The Employment Effects of Greenhouse Gas Cap-and-Trade Schemes

The IPCC's 6th assessment report is unequivocal that anthropogenic greenhouse gas (GHG) emissions have caused climate change (IPCC 2023). Historically, economic output and GHG emissions are positively correlated, implying a politically difficult trade-off between economic growth and climate change mitigation. "Cap-and-trade" or "emissions trading systems" (ETS) aim to break this correlation by forcing emitters to pay for the environmental externalities that they impose, incentivizing pollution abatement.
Various ETS are implemented throughout the world covering the main economies (EU, parts of North America, South Korea, China). However, each scheme works independently, creating GHG permits only for their local producers. Due to their unilateral structure, and concerns over negative impacts on international competitiveness, GHG permits have been generally over-supplied, pushing 'carbon prices' very low, and undermining incentives to reduce GHG emissions. Altogether, the literature on the effectiveness of ETS at reducing carbon emission is rather mixed but suggests that, since the tightening of GHG permits, the EU scheme led to a reduction in emissions.

This project aims to estimate the employment effects of ETS, which has been understudied so far. By increasing production costs, ETS might undermine firm competitiveness and thus reduce employment in the affected sectors. Firms might relocate to non-ETS jurisdictions, further affecting local employment. Alternatively, firms might adopt new production methods, raising their profitability and employment. This thesis will update and expand the existing estimates of the employment effects by considering skill-specific employment dynamics due to the tightening of EU-ETS.