Has the EU Emissions Trading System Worked Properly?

Abstract

Climate change poses an unprecedented global challenge, which prompts nations to adopt new strategies to mitigate greenhouse gas emissions. The European Union emissions trading system (EU ETS) is a cornerstone of the EU’s efforts towards a cost-effective fight against climate change. This study examines the effectiveness of the EU ETS by analyzing monthly data from December 2008 to December 2021, with the focus on CO2 emission allowance futures prices, renewable energy indices, coal prices, oil prices, and fossil energy indices. The key findings are as follows: The CO2 emission allowance futures prices have averaged EUR 14.83 per ton, ranging from EUR 2.87 to EUR 76.81, which shows a significant upward trend. The renewable energy index also demonstrated strong growth, with a mean 1562.07 and maximum 4571.96. Coal prices have averaged EUR 65.32 per ton, while Brent oil prices averaged EUR 59.85 per barrel. A cointegration analysis revealed a long-run equilibrium relationship between these variables. The Vector Error Correction model (VECM) revealed significant negative responses to long-run equilibrium deviations of the renewable energy index (−0.0155) and oil prices (−0.0236), a significant negative short-run response of CO2 prices to their own lagged values (−0.223), and a significant positive short-run effect of oil prices on the fossil energy index (0.254). These results suggest the EU ETS has created significant linkages between carbon, energy, and financial markets. The study concludes that while the EU ETS has made progress in motivating emissions reductions and promoting renewable energy, the system’s efficacy still needs improvement.