Does Common Carbon Pricing Reorient Trade? Partner Selection and the EU ETS

Angelo De Santis, Carla Guerriero (), Antonia Pacelli () and Carmine Russo ()
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Angelo De Santis: University of Naples Federico II
Carla Guerriero: Università di Napoli Federico II and CSEF, https://csef.it/people/carla-guerriero/
Antonia Pacelli: Toulouse School of Economics and INRAE, University of Toulouse Capitole
Carmine Russo: Vienna University of Economics and Business

CSEF Working Papers from Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy

Abstract: We study whether participation in the EU Emissions Trading System (EU ETS) reshapes the selection of trading partners, rather than merely raising production costs. A common carbon price works through two opposing channels: a cost channel that discourages trade with regulated countries, and a regulatory-alignment channel that lowers policy uncertainty between co-regulated partners. Combining a gravity framework with a difference-in-differences design over 1995–2020, we find that bilateral imports between EU ETS members rise by about 11 to 33% relative to non-participants (33% in a staggered Callaway–Sant’Anna design) while exports show no net effect. The import premium grows as the carbon price rises across policy phases and, in product-level data, is mostly concentrated in ETS-covered sectors, pointing to regulatory alignment rather than general integration. The results show that common carbon pricing can strengthen trade integration among insiders without necessarily reorienting trade away from unregulated partners.

Keywords: climate club; regulatory alignment; trading-partner selection; carbon pricing; gravity model; emission trading system; carbon leakage. (search for similar items in EconPapers)
JEL-codes: C23 F14 F18 Q54 Q58 (search for similar items in EconPapers)
Date: 2026-06-16
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