The Domestic Political Consequences of the EU's Emissions Trading System

• In Event: The Environment and Electoral Connections

Abstract

What are the downstream domestic consequences of international efforts to mitigate the effects of climate change? I consider this question in the context of the European Union's Emissions Trading System, a cap-and-trade system that began in 2005 to regulate carbon emissions by requiring firms to acquire tradable permits to pollute. A notable feature of the institution is that from 2005 to 2012, national governments could provide permits to emitters at their discretion free of charge. Conventional wisdom claims that the provision of free allowances is chiefly economic: by subsidizing firms' emissions, governments could safeguard the competitiveness of regulated industry and attempt to avoid carbon leakage. However, I argue that the provision of free allowances serves as a political tool and can be used to facilitate economic activities that would allow voters to deliver incumbents positive electoral returns. I show descriptively that increasing the receipt of free allowances is associated with increased vote shares for the incumbent government relative to their performance in the previous election. Free allowances not only subsidize firms' emissions, but they also aim to alleviate costs, thereby stimulating economic activity and contributing to a "good signal'' that voters observe when assessing incumbents. Accordingly, I also document that increased provision of free allowances is associated with greater subnational GDP, household income, but also greater local emissions. Free allowances therefore introduce conflict into addressing the effects of climate change. This project has consequences for how we think about the strategic adjudication between achieving climate goals and domestic electoral incentives.

Author

• Justin Melnick, New York University