Industrial Effects of Climate Change Policies through the EU Emissions Trading Scheme

Resumo

This paper deals with the effects on industries and macroeconomic aggregates of the application of a standard economic instrument to control greenhouse gas emissions: emissions trading. After distributing the Kyoto-mandated allocation among member states, the European Commission established a rather conventional emissions trading scheme. The sphere of application of the market is limited, with only certain sectors being subject to it (mostly industries), and tradable permits are grandfathered. Both facts have important consequences in efficiency and distributional terms, also raising (normative) concerns on the actual and desirable regulatory menu. The paper mainly focuses on the (positive) efficiency and distributional effects of the EU emissions trading system on Spanish industries, with the use of a static general equilibrium model, also incorporating some hypothetical simulations (broader scope of the market and the auction of permits). The results indicate that the narrow nature of the EU emission trading market generates efficiency costs and relevant distributional effects. Other options, such as permit auctioning, would bring about even wider efficiency and distributional effects on the industrial sectors.