Extricating the impacts of emissions trading system and energy transition on carbon intensity

Emissions trading systems (ETS) are market-driven mechanisms designed to reduce greenhouse gas emissions (GHGs) by levying the cost of carbon. Although ETS has been implemented effectively in certain regions, concerns about its efficacy in Organisation for Economic Co-operation and Development (OECD) countries persist, as it may be hindered by a combination of factors, such as exorbitant costs, inadequate coverage, political reluctance, policy disruptions, and a lack of clear understanding of the underlying mechanism through which it affects carbon intensity. In this study, we analyse the effects of the ETS and energy transition on carbon intensity for a panel of 24 OECD countries during 2000–2019 using advanced dynamic econometrics. Our empirical approach involves three primary specifications: utilizing standard panel methods, which are innovative in controlling unobserved heterogeneity. We then explored the long-and short-run relationships using the generalised method of moments (GMM) dynamic family; and applying the quantiles via moments model to re-evaluate the heterogeneity drivers of carbon neutrality. We also use an alternative and complementary statistical procedure by Hausman–Taylor and the feasible generalised least squares (FGLS) model as robustness checks. Our findings indicate that implementing an ETS and investing in renewable energy can significantly reduce carbon emissions. However, economic growth and carbon taxes increase carbon emissions. These findings emphasize the importance of adopting a comprehensive strategy towards an effective emission trading system and expansion of renewable energy in reducing carbon emissions. Moreover, prioritizing current and past emissions is necessary for a quick transition to a low-carbon economy in OECD countries.