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The Drivers of Emission Reductions in the European Carbon Market

Author

Listed:
  • Hilde C. Bjørnland
  • Jamie L. Cross
  • Felix Kapfhammer
Abstract
This paper studies the drivers of emission reductions in the carbon market of the European Union Emission Trading System (EU ETS) since its inception in 2005. We introduce a novel empirical framework that facilitates the joint identification of simultaneous demand and supply shocks underlying the European carbon market. We find that emission supply restrictions of the EU ETS were the dominant driver of emissions reductions, reducing emissions by 46%. However we also find that two opposing emission demand factors also played an important role. Demand from industrial economic activity increased emissions by 15%, while other demand-side factors, primarily reflecting the transition to low-carbon economies, reduced emissions by 21%.

Suggested Citation

  • Hilde C. Bjørnland & Jamie L. Cross & Felix Kapfhammer, 2023. "The Drivers of Emission Reductions in the European Carbon Market," CAMA Working Papers 2023-53, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    • Handle: RePEc:een:camaaa:2023-53
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    File URL: https://cama.crawford.anu.edu.au/sites/default/files/publication/cama_crawford_anu_edu_au/2023-10/53_2023_bjornland_cross_kapfhammer.pdf
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    More about this item

    Keywords

    climate policy; carbon pricing; emission trading system; cap and trade; demand and supply;
    All these keywords.

    JEL classification:

    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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