The Economic Geography of European Carbon Market Trading

Abstract

The European Union Emissions Trading Scheme (EU ETS) is the world’s first regional carbon trading market. Its objective is to link European countries around a common price for carbon as a step towards helping the global economy transition to a low-carbon production base. This article is one of the first quantitative econometric attempts to understand how a carbon price operates across different economies. We find that the economic impact of a carbon price varies depending on the underlying energy market structure where the carbon price is imposed. This impact is much stronger than institutional differences associated with the volume of free carbon allowances and the carbon intensity of energy technologies. By examining the role of underlying energy market structures on the role of carbon pricing, this paper contributes to an emerging academic literature on the economic geography of carbon markets. This is relevant to governments around the world which are considering a carbon price in economies with unique energy market legacies.