Ex-post evaluation of emissions trading in 2023 : focus on distributional and competitiveness effects.
Date: 2024-02-19
Institutions: European University Institute
Subjects: emission trading, energy efficiency, environmental policy, reduction of gas emissions

LIFE COASE – Collaborative Observatory 
for ASsessment of the EU ETS

Ex-post evaluation of emissions 
trading in 2023:  
focus on distributional  
and competitiveness effects 

Highlights

•  This policy brief reviews some of the latest studies on distributional 
and competitiveness effects that were presented at the International 
Conference on Ex-Post Evaluation of Emissions Trading organised 
under the framework of the LIFE COASE project. 

•  Two main barriers to carbon pricing recur increasingly in the relevant 
literature:  fears  about  negative  impacts  on  the  competitiveness  of 
businesses if carbon prices are imposed unilaterally at the national 
level;  and  concerns  about  fairness,  especially  in  relation  to  low-in-
come households. 

•  On average, low-income  households are likely to be disproportion-
ately affected by carbon pricing, but there are significant disparities 

Issue 2023/25

Authors

Paul Ekins, University College London; Marie Raude, FSR Climate; Albert Ferrari, FSR Climate;  
Lea Heinrich, FSR Climate; Simone Borghesi, FSR Climate and University of Siena;

POLICY BRIEFwithin  income  groups.  Factors  like  rural  or  ur-
ban residence, the energy efficiency of homes, 
and commuting requirements all influence how 
households are impacted.  

•  Revenues  from  carbon  pricing  are  increasing 
and  governments  need  to  choose  wisely  how 
to  spend  them.  Green  investments  in  energy 
efficiency  or  low-cost  renewables,  as  opposed 
to lump sum payments, reduce long-term costs 
for  households  and  contribute  to  climate  tar-
gets. Fairness and distributional issues are key 
to public perceptions and to the social accept-
ability of carbon pricing. Levels of support can 
be increased by devoting the revenues to green 
investments. 

•  The  literature  suggests  that  there  is  currently 
little  evidence  of  negative  effects  from  carbon 
pricing  on  productivity  and  employment.  Little 
evidence of carbon leakage has also been re-
ported. Some evidence of innovation was found 
in terms of directed technological change, which 
may increase competitiveness.  

•  As the caps in emission trading systems tighten 
and carbon prices rise, there is nervousness of 
larger impacts on competitiveness of EU indus-
try. This particularly affects the energy-intensive 
sectors, which have to buy their permits instead 
of receiving them for free. 

Introduction

Carbon pricing has long been economists’ favoured 
tool of carbon emissions reduction. It is increasingly 
being  applied,  both  as  carbon  taxes  and  through 
Emissions Trading Systems (ETSs). However, car-
bon prices are still typically low, and well below both 
mainstream estimates of the Social Cost of Carbon 
(SCC)1  and  the  carbon  prices  estimated  to  be  re-
quired to meet the temperature targets of the Paris 
Agreement.

Two main barriers to carbon pricing recur increas-
ingly in the relevant literature: fears about negative 
impacts  on  the  competitiveness  of  businesses  if 
carbon  prices  are  imposed  unilaterally  at  the  na-
tional level; and concerns about fairness, especially 
in relation to low-income households and individu-
als. Some of the latest studies in these fields have 
been presented at the International Conference on 
Ex-Post  Evaluation  of  Emissions Trading,  held  on 
20 June 2023 at the Florence School of Regulation2 
in the framework of the LIFE COASE project3 and 
are summarised in this policy brief.

Distribution and fairness

The  distributional  issues  related  to  carbon  pricing 
are  largely  driven  by  perceptions  of  ‘fairness’  –  to 
self, to others and in respect of governmental pro-
cedures  for  its  introduction  (Steckel,  2023).  Most 
obviously, such issues can be considered between 
different  income  groups,  e.g.,  between  the  richest 
and  poorest  groups  (vertical  distribution),  but  also 
looking  at  ‘hardship  cases’  within  different  groups 
(horizontal  distribution).  Governments  obviously 
have the option of changing the first-order distribu-
tional effects from carbon pricing by making trans-
fers  within  or  between  groups,  perhaps  using  the 
revenues from the carbon price, or by using the rev-
enues in different ways. What they do with the rev-
enues, and how they do it, is important not just for 
the distributional outcome but also for perceptions 
of procedural fairness. 

1 

2 

The Social Cost of Carbon (SCC) tries to estimate the economic damages that is caused by emitting one ton of CO2 into 
the atmosphere.

The programme and other details of the conference, including the presentations, may be found at https://fsr.eui.eu/event/
international-conference-on-ex-post-evaluation-of-emission-trading/. A first version of this policy brief can be found in the 
following deliverable of the project LIFE COASE: https://fsr.eui.eu/wp-content/uploads/2023/10/Deliverable-5.1_Summa-
ries-of-Workshop-and-Conference-2023.pdf

3 

More information about the project LIFE COASE can be found here: https://lifecoase.eui.eu 

2  

  Robert Schuman Centre | December 2023

On average, low-income households are likely to be 
disproportionately affected by carbon pricing, but it 
is  also  crucial  to  recognize  significant  disparities 
within  income  groups.  Factors  like  rural  or  urban 
residence, the energy efficiency of homes, car own-
ership  and  commuting  requirements  all  influence 
how households are impacted. Governments need 
to choose wisely how to spend the revenues. There 
was a clear preference for green investments, such 
as  energy-efficient  renovations,  rural  transport  ini-
tiatives,  and  electric  vehicle  adoption.  These  not 
only reduce long-term costs for households but also 
contribute to climate targets. Direct income support 
to households, in contrast, may not be as effective.

Steckel (2023) finds that carbon pricing is more pro-
gressive  in  poorer  countries,  when  it  is  applied  to 
transport, and when its wider economic effects are 
taken into account. Between groups, the key vari-
able that determines whether the first-order effects 
of carbon pricing are regressive is expenditure on 
carbon-based energy. In richer countries, such en-
ergy expenditure is normally a higher proportion of 
poor households’ expenditure than for rich house-
holds, so that the first-order effects are regressive, 
but this is not true for poor countries. Analysis us-
ing  Steckel  (2023)’s  dataset,  that  excludes  North 
America  and  most  European  countries,  finds  that 
carbon pricing is not regressive for the Sub-Saha-
ran African  countries  except  South Africa,  for  Lat-
in  American  countries  except  Peru,  and  for  most 
Asian countries, including China and the countries 
of  South  and  South-East Asia,  although  there  are 
regional  differences  within  countries,  and  the  ef-
fects in individual countries depend crucially on the 
design  of  the  carbon  pricing.  Policy-relevant  stud-
ies of carbon pricing therefore need to take regional 
and local differences into account. 

Within  groups,  there  can  be  huge  variation  in  the 
first-order  effects  of  carbon  pricing.  For  example, 
while in Vietnam the median effect on the poorest 
quintile was 2.4%, 5% of that quintile experienced 
an  effect  of  more  than  7%  –  and  it  is  often  differ-
ent characteristics across groups (e.g., rural vs. ur-
ban, or car ownership, as noted above) that gener-
ate the largest political impacts. In Latin American 
countries,  while  in  the  majority  of  countries  ener-
gy expenditure was the most important variable in 
explaining the impacts of carbon pricing, for Costa 

Rica, the Dominican Republic, Guatemala and Mex-
ico, the key explanatory variables were car owner-
ship  and  cooking  fuel.  Unintended  consequences 
from carbon pricing or subsidy reform can also be 
important,  as  when  the  removal  of  fossil  fuel  sub-
sidies for clean cooking fuels causes a resumption 
of  reliance  on  biomass  for  cooking,  with  its  nega-
tive health and environmental effects. However, the 
first-order effects, within groups, between different 
characteristics, and unintended consequences vary 
so much according  to the context that generalisa-
tions  are  not  helpful,  and  each  case  needs  to  be 
assessed in its own right. 

Much the same is true when governments seek to 
compensate for distributional effects through tax re-
form or social transfers, when much depends on the 
existing  structure  of  taxation  and  the  coverage  of 
social transfer schemes. In each case, it is possible 
to design a system that is progressive overall, but 
which still misses out non-negligible proportions of 
the poorest and worst affected households. When 
transfers are used, a targeted transfer will be more 
beneficial  for  the  majority  of  low-income  house-
holds but will exclude certain ‘hard-to-reach’ poorer 
households,  while  a  universal  transfer,  such  as  a 
lump  sum  per  person  or  household,  will  be  more 
inclusive.  That  said,  where  lump  sum  distribution 
has  been  tried,  evidence  from  Canada  suggests 
that people have an inaccurate perception of what 
sums they are actually receiving, and their percep-
tions tend to align more with their political orienta-
tion than with the reality of the situation and strongly 
affect  the  social  acceptability  of  policies.  Govern-
ments which wish to use carbon pricing should put 
effort into communication about what they are do-
ing, and why and how they are using the revenues. 

An interesting result on an alternative use of the rev-
enue is that in some cases compensation schemes 
can be made twice as progressive by using (some 
of)  the  revenues  to  invest  in  basic  infrastructure 
(e.g.,  electricity,  sanitation,  water)  for  the  poor. 
However, the time lags for the investment benefits 
to become apparent may not help with the immedi-
ate acceptability of the carbon pricing measure. 

Fairness  and  distributional  issues  are  key  to  pub-
lic perceptions, and social acceptability more gen-
erally, of carbon pricing. Apart from issues of cost, 
some  of  those  who  oppose  carbon  pricing  do  so 

3  

  Ex-Post Evaluation of Emissions Trading in 2023: Focus on Distributional and Competitiveness Effects  - 2023

because they do not perceive it to be effective, al-
though levels of support can be increased by devot-
ing the revenues to ‘green spending’, and, perhaps, 
by avoiding the use of the term ‘tax’ and levying the 
carbon pricing upstream.  

The EU’s Social Climate Fund (SCF) is a prime ex-
ample of an instrument that seeks to address distri-
butional issues arising from carbon pricing, since it 
will channel part of the revenues from the EU ETS 
to support vulnerable groups affected by rising en-
ergy or transport costs. The fund, which is meant to 
come into force in 2027, allows for temporary direct 
income support and for investments in energy effi-
ciency, renovation of buildings, clean heating, and 
cooling  as  well  as  low-emission  mobility  including 
public  transport.  Some  major  challenges  persist 
with regard to revenue spending and the SCF. For 
example,  more  data  and  indicators  are  needed  to 
identify  individuals  most  at  risk  of  being  impacted 
by rising energy and transport costs.  

One  approach  to  carbon  pricing  in  climate  policy 
which has so far not won the support of policymak-
ers is a mandatory global policy that applies to all 
countries. Yet a global survey, reported on by Fabre 
(2023),  finds  high  levels  of  support  for  such  poli-
cy,  whether  this  entails  dividing  up  the  global  car-
bon budget between countries on the basis of their 
population,  or  levying  a  global  tax  on  millionaires 
to finance sustainable development in low-income 
countries.  Focusing  specifically  on  the  Global  Cli-
mate Scheme (GCS), an emission trading system in 
which a basic income is paid to all people out of the 
proceeds of emission auctions, Fabre (Fabre et al., 
2023)  finds  a  modest  level  of  global  support,  with 
generally  stronger  support  in  European  countries 
than in the USA. This support is broadly replicated 
for a whole range of other policies that would result 
in  redistribution  from  richer  to  poorer  countries  to 
enable climate action in those countries. Moreover, 
further  tests  suggest  that  this  support  is  sincere, 
that it is not the result of social desirability bias, and 
that the GCS would not be unpopular electorally. A 
remaining question is why such stated support has 
not  yet  translated  into  actual  global  policies  along 
these lines. There is as yet no clear explanation as 
to why this is the case. 

Another survey reported by Funke et al. (2023) ex-
amined differences in perceptions and attitudes in 

relation to carbon taxes and emissions trading, with 
the  former  hypothesised  as  being  more  salient  to 
consumers and, perhaps, government, and the lat-
ter  more  relevant  to  businesses.  Relative  support 
for  these  two  instruments  varies  in  different  Euro-
pean countries, but overall stands at about 40% for 
each.  Preliminary  work  reported  by  Funke  (Funke 
et al., 2023) correlated the support for each instru-
ment  across  a  wide  range  of  characteristics  and 
perceptions, some of the most significant of which 
are reported here.  

For  example,  the  possession  of  a  college  degree 
was positively correlated with support for a carbon 
tax  but  slightly  negatively  correlated  with  emis-
sion  trading.  Concern  about  climate  change  was, 
perhaps  unsurprisingly,  positively  correlated  with 
support for both tax and trading, with tax showing 
the more positive correlation. There was a positive 
correlation,  too,  between  carbon  pricing  (both  tax 
and trading) and those with a green voting prefer-
ence, with tax again showing the stronger correla-
tion. Those with liberal voting preferences showed 
a positive correlation with support for trading but a 
negative correlation with support for a tax. The be-
lief in a strong role for government in the net-zero 
transition  correlated  with  support  for  both  tax  and 
trading, with tax again the slightly stronger correla-
tion. While perceptions that the instrument was easy 
to evade was correlated negatively with support for 
an ETS as expected, it was surprisingly correlated 
positively  with  support  for  a  tax.  Support  for  both 
instruments was correlated positively with percep-
tions of trust in government, but only for trading with 
perceptions  of  trust  in  business.  Support  for  both 
instruments was also positively correlated (trading 
more than tax) with perceptions of equitable burden 
sharing, but only support for trading was correlated 
with perceptions that the instruments increased the 
government  budget.  Support  for  both  instruments 
was strongly correlated (trading more than tax) with 
perceptions of both their effectiveness in reducing 
emissions and their positive effects on innovation. 
On the negative side, support for both instruments 
was  negatively  correlated  (tax  more  than  trading) 
with  perceptions  that  they  increased  the  cost  of 
living  and  had  a  negative  effect  on  the  economy. 
Perhaps as a result of this, support for both instru-
ments  was  negatively  correlated  with  those  in  the 
lowest income tertile. Comparing a carbon tax and 

4  

  Robert Schuman Centre | December 2023

the EU ETS directly, the most significant effects of 
a shift from a carbon tax to trading were perceived 
to be increased fairness of both burden sharing and 
ease  of  evasion,  and  lower  effectiveness  of  emis-
sion  reduction,  negative  effects  on  the  economy, 
increases in the cost of living and increases in the 
government budget. 

EU governments receive significant revenues from 
the EU ETS: revenues from auctions, 50% of which 
are intended to be invested in decarbonisation, and 
funds from the 10c derogation applicable to some 
countries  to  help  them  modernise  their  electricity 
sectors. Poland was the largest EU recipient of der-
ogation 10c funds. Sobkiewicz and Kobyłka (Kobył-
ka et al., 2023) evaluated the impact of these funds 
in Poland from 2012-2020, focusing particularly on 
their impact on the level of investment and the de-
velopment of infrastructure in the context of the en-
ergy transition and the achievement of sustainable 
development objectives.  

The  evaluation  showed  that  the  auction  revenues 
were  not  invested  in  ways  that  brought  about  sig-
nificant additional decarbonisation, and there were 
few investments in infrastructure. The 10c deroga-
tion funds financed 378 projects, but 82% of these 
were focused on coal-fired plants, and only 1% in-
volved investment in renewables. Nor did the der-
ogation funds fulfil the other required objectives of 
these  funds,  namely  that  they  should  contribute 
to diversification of the supply mix and should not 
cause distortion in the power market. These funds 
were allocated to the coal-fired power sector and re-
sulted in a negligible (1%) increase in renewables. 
Neither  funding  source  was  therefore  effective  in 
contributing  to  the  objectives  for  which  they  had 
been established. It may be that the changes to the 
regulations after 2020 will lead to an improvement 
in the way these funds are being used. At the same 
time, carbon prices in these systems are becoming 
both higher and more volatile, and this introduces 
both uncertainty for businesses in the business cy-
cle and potential risks for the financial system. 

A specially constructed model showed that the two 
main  drivers  of  the  ETS  price  and  its  associated 
volatility, in respect of the EU ETS, are ‘abatement 
shocks’  (i.e.,  the  trajectory  of  emission  reduction) 

and ‘climate sentiment shocks’ as a result of other 
climate policies (Benmir et al., 2023). Optimality in 
respect of carbon pricing is achieved when the car-
bon price follows the SCC. A comparison between 
this and the ETS price shows that the SCC is a fac-
tor of 10 less volatile than the ETS price. A carbon 
cap rule that adjusts the cap in order to make it as 
close  as  possible  to  the  SCC  is  shown  to  reduce 
significantly  the  volatility  in  the  carbon  price  from 
the ETS.

Competitiveness and industrial 
transformation

As  noted  in  the  Introduction,  fears  about  the  loss 
of economic competitiveness are a major barrier to 
the implementation of carbon pricing at the national 
level, in the absence of global harmonised carbon 
pricing. This economic concern spills over into envi-
ronmental concern, because if low carbon prices in 
some regions incentivise the movement of econom-
ic activity there, carbon emissions in those regions 
may  increase,  offsetting  the  emission  reduction  in 
high-price regions – a phenomenon known as car-
bon leakage.   

The literature cited at the conference on these issues 
is relatively clear: there is currently little evidence of 
negative  effects  from  carbon  pricing  on  productiv-
ity and employment (Trinks, 2023; Bremer, L. and 
Sommer, K., 2023); there is very little evidence of 
carbon leakage (Dechezleprêtre et al., 2019; Martin 
et al., 2014); and there is some evidence of inno-
vation  in  terms  of  directed  technological  change, 
which may increase competitiveness (Calel, R. and 
Dechezleprêtre, A., 2016). However, as the caps in 
emission trading systems tighten, and carbon pric-
es rise, there is nervousness in respect of the EU 
ETS  of  larger  impacts  on  competitiveness,  espe-
cially if energy-intensive sectors have to buy, rather 
than be freely allocated, their emission allowances 
in the future, as is foreseen. This has led to the in-
troduction  by  the  European  Union  of  the  CBAM,4 
with  a  view  to  ‘levelling  the  playing  field’  between 
carbon-intensive  imports  and  the  EU’s  energy-in-
tensive industry, by charging a levy on imports that 
reflects  the  embodied  emissions  and  related  car-
bon pricing of the exporting country. 

4 

See  https://taxation-customs.ec.europa.eu/carbon-border-adjustment-mechanism_en#:~:text=On%201%20October%20
2023%2C%20the,importers%20ending%2031%20January%202024.

5  

  Ex-Post Evaluation of Emissions Trading in 2023: Focus on Distributional and Competitiveness Effects  - 2023

The EU ETS is of course just one emissions trading 
system, and in recent years, many other such sys-
tems have been established, or are under develop-
ment. Wang (Ruijie, T. et al., 2023) explored emis-
sions reduction in different sectors as a result of the 
introduction of the ETS in Beijing. Phase 1 of this 
ETS  ran  over  2013-2015  and  involved  firms  with 
emissions  greater  than  10  ktCO2.  An  interesting 
difference between the introduction of this scheme 
and that in Europe was that in Europe the criteria 
for being involved in the scheme were announced 
well in advance, whereas in China the criteria were 
only  announced  immediately  before  the  scheme 
was introduced, so there was no ‘announcement ef-
fect’ before the scheme’s introduction. In Phase 2, 
from 2016, the threshold for inclusion in the scheme 
was  lowered  to  5  ktCO2.  By  estimating  the  emis-
sions  reduction  in  affected  firms  over  2013-2015 
Wang (Ruijie, T. et al., 2023) showed that there was 
significant  emissions  reduction  in  industry,  but  no 
significant reduction in service sectors, with the re-
duction among heavy coal users being the largest 
of all. The main abatement mechanism seemed to 
be fuel-switching away from coal. A further piece of 
analysis indicated that the way emission allowanc-
es were allocated did not significantly affect emis-
sions, except perhaps among smaller and service 
sector  firms,  for  whom  the  transaction  costs  may 
have been non-trivial.  

Bremer  (Bremer  and  Sommer,  2023)  explored 
many  of  the  same  issues,  specifically  competi-
tiveness (employment and profits) and technology 
adoption  (investments)  in  relation  to  Dutch  manu-
facturing  firms  (actually  coherent  ‘business  units’ 
in  these  firms)  involved  in  the  EU  ETS,  split  into 
three  cohorts,  with  Cohort  1  (the  most  energy-in-
tensive) involved in the ETS’s Phases 1, 2 and 3, 
Cohort 2 only involved in Phases 2 and 3 and Co-
hort 3 only involved in Phase 3. The findings of the 
regressions, which compared the companies in the 
ETS with matched controls, suggest (using a differ-
ence-in-difference  [DiD]  methodology)  that  Cohort 
1  experienced  some  initial  negative  effect  on  em-
ployment  in  Phase  1,  but  that  this  disappeared  in 
Phases 2 and 3, while this effect persisted through 
the  three  Phases  when  using  a  two-way  fixed  ef-
fects methodology (TWFE) (i.e., methodology mat-
ters). Neither method showed significant effects on 
profits but DiD did show a lasting negative effect on 
investment, which was absent in TWFE. 

6  

  Robert Schuman Centre | December 2023

The  impacts  of  the  EU  ETS  on  industrial  compet-
itiveness  were  also  the  focus  of  Cameron  (2023), 
with  the  addition  of  the  associated  risk  of  carbon 
leakage. The  literature  on  the  risk  of  carbon  leak-
age  is  divergent.  Theoretical  studies  suggest  that 
the risk is high, ex-ante modelling finds that it de-
pends  highly  on  input  assumptions,  such  as  elas-
ticities,  and  ex-post  evaluations  suggest  that  it  is 
small. It is possible that explanatory factors for this 
divergence  may  include  the  allowance  allocation 
method (e.g., free allocation), the stringency of the 
policy (with ETS prices being low until quite recent-
ly) or the structure (e.g., the degree of monopoly) of 
the industries concerned. In terms of measuring the 
risk of carbon leakage, the European Commission’s 
indicators  (trade  intensity,  emission  intensity,  and 
qualitative  assessment  of  threshold  cases)  have 
been  found  to  overestimate  the  carbon  leakage 
risk. The focus of Cameron (Cameron, 2023) was 
to explore the potential implications of market struc-
ture for carbon leakage risk, by using a hypothetical 
monopolist  test  for  market  power  (asking  whether 
the  profit  after  a  5%  price  increase  is  higher  than 
before  the  increase)  and  estimating  substitution 
elasticities  for  different  products  (in  this  case  hy-
draulic cement, clinker, and flat and long steel) over 
the period 2008-2018. The main results of this es-
timation suggest, somewhat counter intuitively, that 
“cement  products  are  more  substitutable  between 
countries than steel products; sub-products do not 
vary substantially in terms of their substitutability”; 
and that steel is mostly traded in national markets 
while  cement  has  mostly  regional  and  sometimes 
global markets. The focus of this paper on substi-
tutability is complementary to a focus elsewhere in 
the literature on pass-through rates of the value of 
emission allowances, and an interesting extension 
of this work would be to link the two concepts. 

Arlinghaus  (Arlinghaus  et  al.,  2023)  focused  on 
the way in which climate policy, especially the EU 
ETS  in  Europe,  affects  the  financial  sector,  given 
the  price  volatility  of  EU  ETS  allowances  and  the 
differential exposure of firms, and therefore banks, 
to the EU ETS. In Phase 3 of the EU ETS the in-
troduction  of  the  Market  Stability  Reserve  and  in-
crease in the Linear Reduction Factor (LRF) in the 
supply  of  allowances  put  upward  pressure  on  the 
EU  ETS  price. At  the  same  time,  the  introduction 
by the European Central Bank of a Negative Inter-
est Rate Policy (NIRP) in 2013-2014 constituted a 

shock to the financial sector that was felt differen-
tially by banks, with those with the highest depos-
its/assets  ratios  being  the  most  affected.  The  re-
sult is that the most affected banks had a stronger 
incentive  to  increase  their  lending,  and  the  paper 
analysed whether they did so differentially between 
ETS  and  non-ETS  firms.  The  results  of  the  anal-
ysis  suggest  that  banks  increased  their  lending  in 
the  short  run  to  ETS  firms  more  than  to  non-ETS 
firms, and reduced the required collateral for these 
loans, and their estimated probability of default, for 
these  ETS  firms.  While  the  reasons  for  these  re-
sults are unclear, one hypothesis is that, in line with 
the  Porter  hypothesis,  the  regulation  through  the 
ETS caused ETS firms to increase their innovation 
and investment. 

Trinks  (2023)  investigated  the  possible  carbon 
leakage from carbon pricing, covering 15 industrial 
sectors and 32 countries over 2000-2014, and us-
ing both explicit and implicit carbon prices, with the 
latter  being  estimated  from  other  taxes  (e.g.,  fuel 
duties)  or  other  measures  of  climate  policy,  such 
as  standards  and  regulations.  Six  dimensions  of 
firm performance (sales revenue, investment, em-
ployment, profitability and firm exit) were regressed 
against these carbon costs, and only employment 
showed  a  significant  but  small  reduction,  with  a 
USD  50/tCO2  carbon  price  leading  to  a  2.5%  re-
duction in employment. However, the results show 
considerable  heterogeneity  across  different  types 
of firms, with the greatest effect on employment be-
ing  shown  in  small  firms  most  subject  to  leakage 
risk, which also showed the largest increase in pro-
ductivity,  while  large  and  capital-intensive  firms  in 
covered sectors showed the greatest (but still quite 
small)  increase  in  investment.  Both  profit  and  the 
probability of exit were hardly affected at all for any 
type  of  firm,  while  the  (negative)  employment  ef-
fects  and  (positive)  investment  effects  were  most 
clearly  shown  in  EU  countries.  There  is  thus  little 
evidence in this analysis for adverse economic ef-
fects and relocation from carbon pricing, and such 
small effects as are seen are concentrated in small 
sub-groups  in  sectors  affected  by  leakage.  One 
possible  explanation  for  this  is  that  carbon  costs 

over  the  period  were  relatively  low,  and  they  may 
therefore have larger effects in the future if they in-
crease  significantly,  although  countervailing  policy 
measures, such as the CBAM may mitigate this. 

CBAM  was  the  explicit  topic  of  Wildgrube  (2023), 
which first explored whether CBAM creates a ‘level 
playing  field’  for  the  products  (iron  and  steel,  alu-
minium,  cement,  electricity,  hydrogen,  ammonia 
and fertilisers), to which, from 2027, it will apply. In 
principle, CBAM will equalise carbon costs for the 
covered  products  when  sold  in  the  EU.  However, 
many other market distortions will remain, including 
carbon  costs  in  export  markets  and  special  finan-
cial support in some EU countries for electricity and 
renewables.  Importers  may  be  disadvantaged  by 
CBAM’s incidence on imported products, whereas 
the EU ETS applies to installations.5 In fact, given 
the huge differences that exist in markets in differ-
ent countries, it may be that the focus on the level 
playing field is misleading, and may even stand in 
the way of industrial transformation, which has his-
torically been a characteristic and driver of industri-
al development. To enable low-carbon transforma-
tion in the EU, perhaps, rather than worrying about 
trade  effects  of  carbon  pricing,  the  policy  focus 
should  be  on  installing  low-carbon  infrastructure, 
developing low-carbon technologies and providing 
regulatory certainty. Abroad, it may be that the EU 
should seek to encourage carbon pricing more flex-
ibly than seeking to equalise carbon costs between 
its own products and imports in its own markets.  

If  the  focus  is  to  be  on  industrial  transformation, 
then  clearly  research  has  a  crucial  role  to  play  in 
the development of technologies and of scenarios 
as to how such transformation might take place and 
what it would look like. 

Pommeret  (2023)  is  another  exploration  of  the 
trade effects of a border carbon adjustment (BCA), 
in  the  context  of  a  wider  piece  of  work  on  short-
run  transition  risk  from  climate  policy.  Such  risk 
could  arise  from  multiple  interacting  causes  in-
cluding  Keynesian  shocks  (investment),  inflation, 
input substitutions, stranded assets, labour adjust-
ments  (with  sectoral  heterogeneity),  technological 

5 

Imported goods in the sectors covered by CBAM will pay a carbon price on embedded emissions from 2027, taking into 
account carbon prices already paid in the country of origin. For the same sectors, free allowances will be phased out in 
the EU ETS to create a level playing field so European sectors will be exposed gradually to the full carbon price. However, 
market distortions may persist, as noted in the main text.

7  

  Ex-Post Evaluation of Emissions Trading in 2023: Focus on Distributional and Competitiveness Effects  - 2023

change,  shocks  on  competitiveness,  sufficiency/
sobriety  (lifestyle  change),  critical  raw  materials, 
social acceptability, and financial contagion. The fo-
cus of this paper was on the last of these, modelling 
how ambitious climate policies such as a carbon tax 
and  BCA  might  transmit  across  borders,  with  and 
without  financial  frictions,  leading  to  difficulties  in 
financing investments. Scenarios explored the im-
pact of an unexpected carbon tax of USD 80/tCO2 
being imposed in the home economy, both with and 
without  financial  frictions.  Without  these  frictions, 
there is carbon leakage and negative economic im-
pacts  on  the  home  country’s  polluting  industry,  as 
capital  flows  abroad  and  into  the  green  sector  at 
home.  Introducing  financial  frictions  exacerbates 
the negative economic impacts at home, reducing 
output  also  in  the  home  non-polluting  sector,  but 
also has a negative impact abroad, the carbon tax 
shock being transmitted through both home and for-
eign banks, and resulting in a lower capital stock in 
both the polluting and non-polluting sectors. In this 
case, there is still carbon leakage, but it is smaller. 
The imposition of a BCA on foreign polluting goods 
amplifies  all  these  negative  effects  but  reduces 
leakage further. A conclusion of the paper is that it 
seems important to take account of financial sector 
linkages when assessing the impact of both carbon 
taxes and BCAs. 

Feng  (2023)  concentrated  on  the  practical  details 
involved  in  CBAM,  specifically  on  the  procedures 
that  might  need  to  be  followed  by  importers  of 
goods in the covered sectors into the EU in order 
to verify the carbon intensity of their products. For 
simple products, it might be sufficient simply to cal-
culate  the  carbon  intensity  of  the  power  inputs  to 
production. But for complex products, for example 
from  the  chemical  industry,  determining  their  car-
bon  intensity  would  involve  complex  processes  of 
life cycle assessment, involving multiple stakehold-
ers. The complexity means that it is unlikely that a 
single ‘one-size-fits-all’ set of guidelines or regula-
tions  would  be  adequate,  but  at  the  same  time  a 
case-by-case  approach  may  not  be  manageable. 
Feng (2023) proposed a “coordinated social gover-
nance scheme” involving guidelines from the gov-
ernment, a self-regulated  assessment by industry, 
with professional third-party certification, and social 
reliance  on  competitors,  NGOs  or  whistle-blowers 
within  the company  to expose  poor  or  inadequate 
practices. 

8  

  Robert Schuman Centre | December 2023

The  USA’s  Inflation  Reduction Act  (IRA)  seeks  to 
stimulate  innovation  and  boost  low-carbon  indus-
trial  transformation  by  directing  federal  spending 
and tax breaks amounting to $500 billion. Although 
the  IRA  was  outside  the  scope  of  the  conference, 
it may be seen as an alternative means to CBAM 
of  accelerating  the  clean  energy  transition,  while 
not disadvantaging domestic industry, although  its 
national  content  requirements  certainly  also  act 
as  a  barrier  to  trade.  Moreover,  the  internalization 
of  environmental  externalities  is  better  addressed 
by  carbon  pricing  rather  than  subsidies.  Perhaps 
some combination of carbon pricing and innovation 
support would be the best approach and would be 
better  still  if  a  single  approach  could  be  harmon-
ised  across  countries.  While  such  harmonisation 
has been achieved in some health-related sectors, 
e.g.,  pharmaceuticals  or  food  standards,  it  would 
probably prove more difficult to achieve with carbon 
abatement.   

Conclusions

Carbon pricing through emission trading seems to 
be outpacing carbon taxation as the pricing instru-
ment of choice.  

The main research questions and methods related 
to carbon pricing have not changed much over the 
years. However, there is a new focus on social as-
pects,  perceptions,  and  public  acceptability,  espe-
cially in respect of the spending of revenues. CBAM 
is a new topic of research. There is a general need 
for better understanding and assessment of the re-
al-world implications of carbon pricing policies, and 
of the interactions between different policies.

Social dimension of emissions trading

In  respect  of  the  distributional  impacts  of  carbon 
pricing, the key issues seem to be the targeting of 
compensation  schemes,  and  their  communication 
to ensure that stakeholders, and particularly those 
most impacted by the schemes, are more aware of 
them. Notwithstanding evidence of a lack of aware-
ness  of  carbon  pricing  and  mechanisms  for  using 
the  revenues  therefrom,  a  global  survey  suggests 
widespread  majority  support  for  carbon  pricing, 
which leaves the unanswered conundrum why poli-
cymakers have so far not succeeded in introducing 
a global carbon price.

firm-level,  meaning  that  different  countries,  sec-
tors, and firms within those sectors may be affect-
ed very differently from the loss of competitiveness 
that  leads  to  carbon  leakage. As  a  result,  policies 
with flexibility in policy design are essential to tackle 
these differentiated impacts and to support affected 
firms that are concentrated in specific geographical 
areas or sectors.  

Despite complexities in its implementation, the EU’s 
introduction of CBAM could represent an initial step 
in addressing this challenge. The ongoing negotia-
tions surrounding CBAM have already had signifi-
cant repercussions in other ETSs, including those 
in the US and China. However, for this instrument to 
be effective in preventing carbon leakage, the EU’s 
focus  should  be  on  safeguarding  industries  most 
vulnerable to carbon leakage, with an emphasis on 
investment rather than compensation measures. In 
parallel to CBAM, the EU should also intensify ef-
forts in the realm of innovation policy and continue 
initiatives  related  to  international  cooperation,  the 
reduction of fossil fuel subsidies, and the facilitation 
of trade policies.

In  general,  the  social  aspects  of  climate  and  ETS 
policies  are  gaining  new  importance,  both  in  ac-
ademia  and  in  policymaking.  There  is  a  growing 
awareness that carbon pricing, especially when ap-
plied  to  heating  and  transportation,  can  have  sig-
nificant  distributional  consequences.  Without  ap-
propriate redistribution of carbon pricing revenues, 
higher energy and fuel prices and a shift in labour 
markets may present a particular burden for low-in-
come households. However, it appears that if only 
a part of the revenues that are generated in ETSs 
are redistributed to lower-income households, or on 
a lump-sum basis, carbon pricing can be made dis-
tributionally progressive. It is thus an important task 
of policy instruments seeking a just transition to use 
ETS revenues to achieve progressive outcomes.

Carbon pricing is likely to raise increasing amounts 
of money that, spent wisely, can benefit poor house-
holds,  and  accelerate  the  green  transition.  Both 
good design and better communication about social 
distribution measures are needed.

Competitiveness and carbon leakage

On  competitiveness  and  the  low-carbon  ener-
gy  transition  more  broadly,  two  very  different  ap-
proaches are being tried in Europe (CBAM) and the 
USA (Inflation Reduction Act).  

There is a long-standing concern that carbon pric-
ing  might  jeopardize  the  competitiveness  of  do-
mestic industries and lead to carbon leakage. This 
risk  arises  from  the  difference  in  environmental 
ambition and stringency of climate policies across 
countries that would negatively impact the compet-
itiveness of firms in countries with more ambitious 
climate goals, potentially shifting pollution-intensive 
production  to  regions  with  less  stringent  climate 
policies. Until now there has been little evidence of 
carbon leakage as a result of the EU ETS, but there 
are  legitimate  fears  that  this  may  not  be  the  case 
as  carbon  prices  increase  and  energy-intensive 
sectors  have  to  start  paying  for  their  emission  al-
lowances. In fact, some recent evidence shows that 
both production and exports from energy-intensive 
industries  in  Europe  have  declined,  while  imports 
have risen, indicating a loss of competitiveness.

Furthermore, the evidence for carbon leakage iden-
tifies  significant  heterogeneity  at  the  sector  and 

9  

  Ex-Post Evaluation of Emissions Trading in 2023: Focus on Distributional and Competitiveness Effects  - 2023

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10  

  Robert Schuman Centre | December 2023

The Florence School of Regulation
The Florence School of Regulation (FSR) was founded in 2004 as a partner-
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the European University Institute (EUI), and it works closely with the Europe-
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11  

  RSC | Policy Brief | Issue 2023/25 | December 2023

doi:10.2870/53782
ISBN:978-92-9466-495-2
ISSN:2467-4540
QM-AX-23-025-EN-N