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Coase and Cap-and-Trade: Evidence on the Independence Property from the European Carbon Market

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  • Aleksandar Zaklan
Abstract
This paper tests the independence property under the Coase Theorem in a large multinational cap-and-trade scheme for greenhouse gas emissions, the EU Emissions Trading System (EU ETS). I analyze whether emissions of power producers regulated under the EU ETS are independent from allowance allocations, leveraging a change in allocation policy for a difference-in-differences strategy. The evidence suggests that the independence property holds overall and for larger emitters. It fails for small emitters, indicating that transaction costs distort their emission decisions. However, due to their small share of aggregate emissions the independence property remains intact at the sector level.

Suggested Citation

  • Aleksandar Zaklan, 2021. "Coase and Cap-and-Trade: Evidence on the Independence Property from the European Carbon Market," Discussion Papers of DIW Berlin 1925, DIW Berlin, German Institute for Economic Research.
    • Handle: RePEc:diw:diwwpp:dp1925
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    References listed on IDEAS

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    Cited by:

    1. Estelle Cantillon & Aurélie Slechten, 2024. "Market Design for the Environment," NBER Chapters, in: New Directions in Market Design, National Bureau of Economic Research, Inc.
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    3. Flori, Andrea & Borghesi, Simone & Marin, Giovanni, 2024. "The environmental-financial performance nexus of EU ETS firms: A quantile regression approach," Energy Economics, Elsevier, vol. 131(C).
    4. Nicola Borri & Yukun Liu & Aleh Tsyvinski & Xi Wu, 2024. "Inefficiencies of Carbon Trading Markets," Cowles Foundation Discussion Papers 2403, Cowles Foundation for Research in Economics, Yale University.
    5. Wen-Hsien Tsai & Wei-Hong Lin, 2024. "Production Decision Model for the Cement Industry in Pursuit of Carbon Neutrality: Analysis of the Impact of Carbon Tax and Carbon Credit Costs," Sustainability, MDPI, vol. 16(6), pages 1-22, March.

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    More about this item

    Keywords

    Coase theorem; independence property; cap-and-trade; EU ETS; greenhouse gas emissions;
    All these keywords.

    JEL classification:

    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

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