Market creation without market authority: Ex-ante evidence from European emissions trading

Jan Abrell and Sebastian Rausch

No 26-037, ZEW Discussion Papers from ZEW - Leibniz Centre for European Economic Research

Abstract: By extending carbon pricing to buildings and road transport through ETS2, the European Union is undertaking a major policy experiment in market creation. ETS2 overlaps national emissions budgets and technology requirements, raising a general question: when does a legal market govern allocation? We distinguish three functions of market effectiveness: scarcity, exchange, and allocation authority. Completing exchange and allocation authority lowers present-value EU policy costs over 2028-2048 by 25.5%, or EUR 1.33 trillion relative to legal market creation only. Allocation authority accounts for 76% of savings; 88% of member states benefit. Compensating remaining losses requires EUR 6 billion, only 0.2% of ETS2 revenues. Restoring allocation authority raises the allowance price but lowers policy cost, implying that the endogenous carbon price in an ETS is not a sufficient statistic for welfare across institutional designs.

Keywords: Carbon pricing; Emissions trading; Market design; EU ETS2; Effort Sharing Regulation; Equilibrium modelling (search for similar items in EconPapers)
JEL-codes: C68 H23 Q54 Q58 (search for similar items in EconPapers)
Date: 2026
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.econstor.eu/bitstream/10419/343564/1/1983020613.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:zbw:zewdip:343564

Access Statistics for this paper

More papers in ZEW Discussion Papers from ZEW - Leibniz Centre for European Economic Research Contact information at EDIRC.
Bibliographic data for series maintained by ZBW - Leibniz Information Centre for Economics ().