How Effective Are Emission Trading Systems in Reducing Emissions ? Empirical Evidence from the EU, New Zealand, and the Republic of Korea

Overview & Synopsis

Emission trading schemes are among the primary pricing instruments to reduce greenhouse gas emissions. Currently, more than 35 emission trading schemes are in operation around the world at multinational, national, and subnational levels. How effective these systems are in reducing emissions is a key empirical question. This study examines the effectiveness of three large-scale emission trading schemes implemented by the European Union, New Zealand, and the Republic of Korea in reducing carbon dioxide emissions. The study employs a generalized synthetic control method on data from 2005–20. The findings show that the EU emission trading scheme led to a cumulative reduction of 21.3 percent in carbon dioxide emissions from the electricity sector and 15.6 lower total carbon dioxide emissions, relative to a scenario with no emission trading scheme. In New Zealand, the emission trading scheme had no statistically significant effect on total national carbon dioxide emissions—largely because nearly half of New Zealand’s emissions come from agriculture, a sector not covered by the country’s emission trading scheme. The effectiveness of Korea’s emission trading scheme varied substantially across phases. Although initially it did not halt the rise in emissions, it became a progressively strong driver of decarbonization over time.