Can EU Emissions Trading System Affect Other Countries? A Panel Study of EU's Trade Partners

Abstract: European Union commenced the EU Emissions Trading System in 2005. EU ETS has proven efficiency in reducing EU-wide greenhouse gas emissions and remains the largest emission trading scheme in the world after one decade of development. Existing literature regarding ETS's external impact mainly focuses on examining carbon leakage while leaving other impacts unexplored. In this thesis I use 2000-2014 sector level panel data from the World Input-Output Database to examine the impact of EU ETS on the emission, export and output of EU's trade partners. I firstly use a diff-in-diff model and find out that the first three stages of EU ETS did not significantly affect any of these aspects. There is neither any sign of carbon leakage nor evidence of technological innovation. Next I conduct a heterogeneity test and confirm that the emission impact is not statistically different for developing and developed countries.