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The secondary benefits of the European emissions trading system: A spatial analysis

12nd National Competition for Economic Research Grants

Public economics

Senior Researcher : Ulrich Wagner

Research Centre or Institution : Universidad Carlos III de Madrid.

Abstract

Climate change will have serious ecological and economic consequences. To mitigate it, a substantial reduction in anthropogenic greenhouse gas emissions is required, in which reducing the consumption of fossil fuels must play an important role, as this accounts for 75% of emissions of the main greenhouse gas, carbon dioxide (CO2). CO2 is not a conventional pollutant as it does not cause local damage, rather it simply contributes to climate change. However, the use of fossil fuels is also the main source of harmful substances which pollute the environment. Consequently, reducing the consumption of fossil fuels generates secondary benefits, above all in terms of health. Simulation studies have demonstrated that the collateral benefits deriving from policies to mitigate greenhouse gases can offset a substantial part of their economic costs.

This project will carry out the first empirical analysis in this regard, focusing on the European Emissions Trading System (EU ETS), the largest market in the world for CO2 emissions. The project will employ quasi-experimental techniques to test whether the EU ETS reduces the emissions of other polluting substances. The econometric analysis will use a micro-database of the emissions of over 90 substances which pollute the air, the water and the soil, in thousands of industrial facilities in 30 European countries.

The results of the project will make it possible to evaluate the consequences of spatial heterogeneity for the global efficiency of the EU ETS and environmental justice. Taking into account the fact that the EU ETS serves as a prototype for many regional emissions trading initiatives around the world, the project could support political decisions beyond the borders of Europe. In addition, the results may be used to evaluate the net economic cost of policies such as the current proposal of the European Commission to raise the European limit for greenhouse gas emissions from 20% to 30% in 2020. Given that international negotiations on a future worldwide climate agreement are at a standstill, unilateral mitigation policies of this kind are likely to become more important in the near future.

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