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Market creation without market authority: Ex-ante evidence from European emissions trading

Author

Listed:
  • Abrell, Jan
  • Rausch, Sebastian

Abstract

By extending carbon pricing to buildings and road transport through ETS2, the European Union is undertaking a major policy experiment in market creation. ETS2 overlaps national emissions budgets and technology requirements, raising a general question: when does a legal market govern allocation? We distinguish three functions of market effectiveness: scarcity, exchange, and allocation authority. Completing exchange and allocation authority lowers present-value EU policy costs over 2028-2048 by 25.5%, or EUR 1.33 trillion relative to legal market creation only. Allocation authority accounts for 76% of savings; 88% of member states benefit. Compensating remaining losses requires EUR 6 billion, only 0.2% of ETS2 revenues. Restoring allocation authority raises the allowance price but lowers policy cost, implying that the endogenous carbon price in an ETS is not a sufficient statistic for welfare across institutional designs.

Suggested Citation

  • Abrell, Jan & Rausch, Sebastian, 2026. "Market creation without market authority: Ex-ante evidence from European emissions trading," ZEW Discussion Papers 26-037, ZEW - Leibniz Centre for European Economic Research.
    • Handle: RePEc:zbw:zewdip:343564
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    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models

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