Carbon Emissions Trading and Environmental Protection: International Evidence

We study how the implementation of emissions trading systems (ETSs) impacts emissions reductions and the usage of renewable energy using a panel sample of the largest 100 countries worldwide. Exploiting cross-country variations in ETS implementations, we show that ETS adoption materially reduced greenhouse gas (carbon dioxide) emissions by 12.1% (18.1%). Moreover, ETSs reduced overall emissions by cutting the usage of fossil fuels such as coal by 23.70% while boosting the usage of renewable energy by 61.59%, on average. In contrast, introducing carbon taxes has a less effective impact on emissions reduction. It fails to boost the usage of renewable energy, though elevating tax rates and expanding tax coverage may help enhance the efficacy of carbon taxes. This paper was accepted by Victoria Ivashina, finance. Funding: H. Ru thanks the financial support from the Nanyang Technological University, and Ministry of Education, Singapore, under its Tier 1 RG134/20. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2023.03143 .