The environmental and economic effects of European emissions trading

In this article, we analyse the effects of emissions trading in Europe, with special reference to Germany. We look at the value of the flexibility gained by trading compared to fixed quotas. The analysis is undertaken with a modified version of the GTAP-E model using the latest GTAP version 6 database. It is based on the national allocation plans (NAP) as submitted to and approved by the EU. We find that, in a regional emissions trading scheme, Germany, Great Britain and the Czech Republic are the main sellers of emissions permits, while Belgium, Denmark, Finland and Sweden are the main buyers. The welfare gains from regional emissions trading—for the trading sectors only—are largest for Belgium, Denmark and Great Britain; smaller for Finland and Sweden, and smallest for Germany and other regions. When we take into account the economy-wide and terms-of-trade effects of emissions trading, however, (negative) terms-of-trade effects can offset the (positive) allocative efficiency gains for the cases of the Netherlands and Italy, while all other regions end up with positive net welfare gains. All regions, however, experienced increases in real GDP as a result of regional emissions trading.