Cap-and-trade and emissions clustering: A spatial-temporal analysis of the European Union Emissions Trading Scheme.

ABSTRACT

One of the most popular policy mechanisms for greenhouse gas emissions regulation is cap-and-trade which is a market-based approach that has come to dominate partially because of its flexibility. With flexibility, however, comes the potential for the clustering of greenhouse gas emissions. To understand whether emissions trading leads to localized clustering of emissions changes, we perform a systematic, spatio-economic assessment of the European Union Emissions Trading Scheme (EU ETS). We analyze the spatial pattern of emissions changes from individual plants across the EU as well as how the pattern changes during the first two phases of the ETS implementation. Our findings indicate that there was clustering of emissions changes at the EU and country level which peaked at the start of the second phase but declined as the EU ETS matured. We also found that iron and steel, coke ovens, and refining have greater clustering and volatility compared to other industries. Based on the air quality implications of these clustered emissions, certain countries and industry types might need additional attention during the ETS design or redesign process. This study makes a novel contribution by systematically evaluating the spatio-temporal and equity implications of emissions distribution in cap-and-trade systems.