Institutional Change and Environment: Lessons from the European Emission Trading System

After more than ten years of operation of EU-ETS trading, it is time to analyse the results and draw lessons from the experience. Economic research typically considers emission price as the main explanatory variables when measuring the effects of Emission Trading Systems. The novelty of this work is to analyse whether or not trade alone, as an institutional change, is effective in reducing greenhouse gases emissions. The objective of this paper is to analyse to what extent the EU-ETS as a “regulatory” instrument of the supply of allowances is responsible for the effectiveness of the carbon market as a basic tool in the reduction of emissions. The analysis also includes other overlapping policies aimed at fighting climate change, for example, the promotion of renewables. For the empirical analysis, an econometric model is estimated using panel data for the 28 European Union countries between 1990 and 2014. The econometric model include three dummy variables to measure the effectiveness of the three phases of the EU-ETS commerce in reducing emissions. Furthermore, we analyse how effective the phases are when renewables energies are included in the analysis. The results show that the EU-ETS is effective to reduce emissions and each phase has a greater impact on the reduction. Nevertheless, the system should be more flexible to adapt to the fluctuations in the demand for rights.