How to reinforce the effectiveness of the EU emissions trading system in stimulating low-carbon technological change? Taking stock and future directions

Abstract

Environmental innovations are one of the most potent means to mitigate climate change. With the European Union Emissions Trading System (EU ETS), the EU has designed a policy instrument with a core objective of promoting investments in innovative, low-carbon technologies. To evaluate the effectiveness of the EU ETS in achieving this objective and to discuss potential policy amendments conducive to this end, this study relies on a literature review of 43 academic articles from 2005 to 2022. Our results indicate that the findings from ex-post empirical analyses provide an ambiguous picture of the link examined herein, potentially due to the contextual heterogeneity of the studies, making it difficult to compare results across studies and amass evidence that can provide practical guidance to policymakers. Notwithstanding, there is near consensus that, so far, the EU ETS has failed to spur the technological change required to achieve carbon neutrality. This failure is implicitly attested to by the several amendments to the EU ETS over time. However, the impact of these amendments on technological change has received only limited attention by the literature. Overall, the EU might stimulate technological change by promoting environmental research networks, international cooperation and organizational innovation.