A Causal Analysis of the European Union Emissions Trading System

This research examines the EU Emissions Trading System (EU ETS), a key policy aimed at reducing greenhouse gas emissions, revealing its complex effects across sectors and national borders. While prior studies have documented emission reductions, they often leave unanswered questions regarding underlying mechanisms, sustainability of improvements, structural shifts in production, global supply chain adjustments, technological disparities, and evolving carbon and energy flows in international trade. Using robust quasi-experimental methods, including a staggered synthetic difference-in-differences approach, this study demonstrates that EU ETS not only reduces emissions but also promotes increased energy efficiency and the adoption of cleaner technologies within regulated countries. The long-term reduction in carbon intensity appears closely tied to enhanced pollutant energy efficiency. Beyond the EU, this research uncovers how unilateral carbon pricing interacts with global supply chains, indicating that EU ETS can reshape international trade dynamics. The findings suggest that this policy often provides competitive advantages to non-regulated exporters while exacerbating technological gaps related to carbon emissions and energy use. This dual impact underscores the challenges associated with implementing unilateral climate policies within a globally interconnected economy. Moreover, while previous empirical studies have struggled to identify clear evidence of carbon leakage resulting from EU ETS, this study suggests that the scheme may indeed shift emissions-intensive activities to countries with weaker environmental regulations. By integrating sector-level and cross-country trade data, the thesis reveals how unilateral measures can influence comparative advantages, production patterns, global net carbon emissions, and energy consumption. To address these unintended consequences, policymakers should pursue enhanced international coordination, promote domestic investments in clean technologies, and facilitate their broader adoption internationally. Such strategies will enable EU ETS to more effectively contribute to global emissions reductions. Additionally, the study identifies heterogeneous responses across different sectors, highlighting the necessity of more targeted and sector-specific policy measures.