Assessing the EU Emission Trading system´s Impact on Economic Growth

Abstract: This study uses a cross-country panel data set to investigate the effect of the EU ETS on economic growth and the total national level of CO2 emission. To estimate this we have conducted a growth regression using country fixed effects model for the period 2003-2012. The results show that, during its first two phases, the EU ETS has been effective in reducing the CO2 emission levels. However, the scheme has so far also been associated with lower economic growth. The results show that the EU ETS has had a negative effect on economic growth and has had a negative impact on total national CO2 emissions. However, it is possible that a large share of the downturn in economic growth and the reduction in CO2 emissions during Phase II has to be attributed to the financial crisis of 2007-2008 and the subsequent Euro crisis. Future research should account for these confounding factors as an extensive investigation on how the EU ETS impacts macroeconomic factors is needed to provide policy makers with complete information that could influence potential changes to the system.