Economic impact of the European Union Emission Trading Scheme : evidence from the refining sector

Abstract

I study the economic impact of the European Union Emission Trading Scheme (EU ETS) on the refining industry in Europe. I contrast previous ex-ante studies with the lessons from a series of interviews I conducted with industrials, and the public data available on the first phase of the scheme, effective from January 1st, 2005 to December 31st, 2007. I conclude that because of organizational inertia, weak incentives linked to the low emission permit price that prevailed during its second part, and important industrial and regulatory constraints, the Phase I of EU ETS has had a limited economic impact on firms. However, this first trading period was instrumental in allowing the rening sector to build the capabilities needed to respond efficiently to the carbon price signal in the long run. I argue that the internal and external constraints that this first phase revealed will shape the future outcome of the scheme. Based on evidence from the rening sector under EU ETS, I take position in the current debate over policy design to suggest ways for regulators to improve the economic impact and environmental effectiveness of carbon markets.