Coase and Cap-and-Trade: Evidence on the Independence Property from the European Electricity Sector

Abstract

This paper provides an empirical test of the Coase Theorem. I analyze whether emissions are independent from allowance allocations in the electricity sector regulated under the EU's Emissions Trading System (EU ETS). Exogenous variation in levels of free allocation for power producing installations enables a difference-in-differences strategy. The analysis reveals that a change in al- location levels does not significantly affect emissions, either at the plant or firm level. However, I identify an adjustment period with temporarily lower emissions for some firms. The results suggest that policy makers may use free allocation as a political tool without compromising the program's cost-effectiveness.