Conference Agenda
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Daily Overview |
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Emissions Trading 3 Location: B136 Session Chair: Coline Metta-Versmessen, LEDa, Paris-Dauphine University, PSL University ,Paris | |
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Carbon price is in the house: short-run effects of the EU-ETS2 1: LEDa, Paris-Dauphine University, PSL University ,Paris, France; 2: LEM, Lille University, Lille, France. This paper analyzes the short-run welfare and distributional effects of the European Union’s Emissions Trading System 2 (ETS2) using a partial-equilibrium model with heterogeneous households and limited short-run substitution away from fossil fuels. In this setting, ETS2 operates as a binding quantity constraint, with permit prices reflecting fossil fuel scarcity and fully passing through into final energy prices. We show that ETS2 reduces fossil fuel consumption and lowers household welfare, with disproportionately larger losses for low-income households due to higher energy expenditure shares. We then compare alternative revenue-recycling schemes that leave the emissions cap unchanged: a per-unit fossil fuel subsidy and lump-sum transfers. While the subsidy distorts marginal incentives and generates ambiguous welfare effects, lump-sum transfers preserve price signals and deliver transparent welfare improvements. Importantly, ETS2 acts as a binding environmental safety net: by capping total fossil fuel use, it ensures environmental compliance regardless of redistribution design. | |