Global heterogeneity in ETS rollouts and subsequent decarbonization outcomes

Abstract

This paper examines emissions trading schemes (ETSs) worldwide and assesses their impact on multiple decarbonization outcomes, namely carbon intensity reduction, absolute emission reduction, and renewable energy adoption. Leveraging spatial-and-temporal variations in ETS introductions and weighted-average ETS carbon prices, we assess the impact of ETSs globally. Our findings indicate that although ETSs have the potential to drive decarbonization, their impacts vary substantially across the world. A key finding is that ETS impacts are significantly shaped by an economy's structural dependence on natural resource rents: greater dependence on natural resource rents weakens the effect of ETS introduction on renewable energy adoption. We also find that ETSs are effective in reducing carbon intensity more in developing economies than in developed economies. Additionally, nationwide ETSs are more effective than partial rollouts. Further, beyond the extensive margin analysis (effect of ETS introduction), the intensive margin analysis reveals that temporal increases in weighted-average ETS carbon price amplify emissions reduction and renewable energy adoption. Overall, our investigation highlights the potential as well as limits of ETSs, suggesting that the economic contexts surrounding ETS rollouts play a substantial role in shaping their effectiveness in accomplishing decarbonization.