Coase and Cap-and-Trade: Evidence on the Independence Property from the European Carbon Market

Discussion Papers 1925, 42 S.

Aleksandar Zaklan

2021. Updated version of DP 1850.

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This paper tests the independence property under the Coase Theorem in a large multinational cap-and-trade scheme for greenhouse gas emissions, the EU Emissions Trading System (EU ETS). I analyze whether emissions of power producers regulated under the EU ETS are independent from allowance allocations, leveraging a change in allocation policy for a difference-in-differences strategy. The evidence suggests that the independence property holds overall and for larger emitters. It fails for small emitters, indicating that transaction costs distort their emission decisions. However, due to their small share of aggregate emissions the independence property remains intact at the sector level.

Aleksandar Zaklan

Research Associate in the Energy, Transportation, Environment Department

JEL-Classification: Q58;Q54;Q52;L94
Keywords: Coase theorem, independence property, cap-and-trade, EU ETS, greenhouse gas emissions