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How effective are emissions trading systems are at reducing carbon emissions and boosting renewable energy usage globally?

Image courtesy of interviewee. December 12, 2024

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This video discusses the impact of emissions trading systems (ETS) on global carbon emissions and renewable energy usage. It highlights that while numerous studies exist on specific regional ETS markets—like those in the EU, US, and China—there has been a lack of global perspective regarding their effectiveness in addressing climate change, which is a global issue.

The paper presents findings from the first comprehensive global study using data from the 100 largest countries by GDP to understand how ETS policies affect emissions. It reveals that adopting ETS leads to approximately a 12% reduction in greenhouse gas emissions and an 18% reduction in carbon dioxide emissions. Additionally, the findings indicate a significant shift from fossil fuels to renewable energy sources, with renewable energy usage rising by nearly 62%.

The ETS, also known as cap-and-trade, effectively caps emissions and allows firms to buy or sell carbon permits, influencing their emissions based on market dynamics. While ETS has shown local effectiveness in reducing emissions, concerns such as "carbon leakage"—where companies move to regions with laxer regulations—question the overall global effectiveness of ETS due to fragmented implementation.

The paper compares the effectiveness of ETS and carbon taxes, concluding that ETS tends to be more effective in reducing emissions and promoting a transition to renewable energy. The average carbon price in ETS markets is significantly higher than in carbon tax regimes, contributing to the latter’s perceived lower effectiveness.

The authors suggest that rather than debating which instrument is better, future climate policies should focus on optimizing the design and scale of both ETS and carbon taxes, improving their impact on emissions reduction and facilitating the transition to cleaner energy sources.

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Here are five key points from the video:

1. **Global Impact of Emissions Trading Systems (ETS)**:
The study examines how emissions trading systems impact global carbon emissions and renewable energy usage by analyzing data from the 100 largest economies in the world. This research aims to address the limitations of previous studies which were often region-specific.

2. **Significant Reductions in Emissions**:
Findings show that the adoption of ETS has led to a significant reduction in greenhouse gas emissions (approximately 12%) and carbon dioxide emissions (approximately 18%). Furthermore, it has contributed to a shift away from fossil fuels by about 24%, increasing the use of renewable energy sources, such as wind and solar power, in electricity production by nearly 62%.

3. **Mechanism of Cap-and-Trade**:
The cap-and-trade mechanism involves setting a total allowance for carbon emissions and allocating permits to firms. If firms exceed their allowance, they must buy permits at market prices, creating a financial incentive to reduce emissions. This system adjusts firm behavior relating to emissions based on the market price of carbon.

4. **Concerns About Carbon Leakage**:
There is a pushback against ETS due to the phenomenon known as carbon leakage, where firms relocate their emissions-intensive activities to regions with less stringent regulations. This can negate some environmental benefits as emissions decrease in ETS-regulated areas but increase elsewhere.

5. **Effectiveness Comparison with Carbon Tax**:
The study suggests that globally, ETS may be more effective than carbon taxes in reducing emissions. The ETS appears to drive a more significant and direct transition to renewable energy. It also highlights the importance of the magnitude of the policies; for instance, the average carbon price in the EU ETS is much higher than the average global carbon tax, which may explain the observed differences in effectiveness.

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Here are some key quotes extracted from the video that highlight the main points and findings of the discussion on emissions trading systems (ETS) and their impacts on global carbon emissions and renewable energy usage:

1. **Global Perspective on Climate Change**:
- "Most studies are region specific, but climate change... we all share one sky."

2. **Study Scope**:
- "In this paper, we pulled together data on the ETS policies from the 100 largest countries measured by their GDP in 2020."

3. **Impact on Emissions**:
- "The ETS adoption has led to significant reductions in emissions, about 12% for greenhouse gas and 18% for carbon dioxide."

4. **Shift from Fossil Fuels**:
- "ETS policies have pushed the countries to shift away from fossil fuels by about 24%."

5. **Renewable Energy Usage**:
- "The usage for electricity production has jumped by nearly 62%."

6. **Mechanism of Cap-and-Trade**:
- "What does it do is... they set up the total allowance in the system and then they allocate each firm how much you can have this carbon emission permit."

7. **Carbon Leakage Concerns**:
- "There's always some pushback, though it's largely due to something called carbon leakage."

8. **Impact of Fragmentation**:
- "This leakage effect raises questions about the overall effectiveness of the ETS at global level, especially when it's implemented in a fragmented way in many local areas."

9. **Comparison with Carbon Taxes**:
- "Our findings suggest that globally ETS tend to be more effective than carbon taxes in terms of reducing emissions."

10. **Impact of Carbon Pricing**:
- "The average carbon price in the ETS market in the EU is currently about almost $70 per ton of carbon... In contrast, the average carbon tax globally is far below $50 per ton."

11. **Magnitude Over Type**:
- "What really stands out from our study is that it's the magnitude of these policies that truly makes a difference."

12. **Policy Design Consideration**:
- "The focus on which instrument is better might be the wrong question altogether."

These quotes synthesize the main arguments and findings of the video, emphasizing the importance of ETS in reducing emissions and promoting renewable energy while also acknowledging the challenges posed by carbon leakage and the comparative effectiveness of carbon taxes.

X-TIMESTAMP-MAP=LOCAL:00:00:00.000,MPEGTS:90000

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We are looking at how emissions trading system

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impact global carbon emissions and renewable energy usage.

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You might think there's

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so many research already on this topic.

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That's right. But there's been plenty

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of work usually on specific ETS markets.

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00:00:17.145 --> 00:00:19.885
For example, the European unions ETS,

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the United States Regional Greenhouse Gas Initiative,

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or China's ETS here is the same.

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00:00:27.035 --> 00:00:31.485
Most studies are region specific, but climate change,

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however is global problem.

12
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Anyway, we all share one sky.

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So you study how effectiveness in the local market,

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it doesn't tell you anything,

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how overall it has solving the problem globally.

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00:00:44.465 --> 00:00:48.205
So in this paper, we pulled together data on the ETS

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policies from the 100 largest countries MA measured

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by their GDP in 2020.

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And this allow us to do the first global study on

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how the ETS policies impact emissions.

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We use a staggered difference indifference approach

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to measure the effects after countries implementing ETS.

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So what we define two big things.

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First, the ETS adoption has led

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to significant reductions in emissions, about 12%

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for greenhouse gas and 18% for carbon dioxide.

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Second, ETS policies have pushed the countries

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to shift away from fossil fuels.

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So fossil fuel's usage for electricity production has jumped

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by about 24%.

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While the renewable energy like wind, solar power,

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and this energies, their usage

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for electricity production has jumped by nearly 62%.

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So when governments tighten restrictions on carbon emissions

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through the ET s,

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it drives a clear transition from fossil fuels

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to the renewable, which is a key part

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of cutting emissions globally.

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Emission treating system is,

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has another name called the cap and the treat.

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What does it do is,

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they set up the total allowance in the system

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and then they allocate each of this firm

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00:02:17.105 --> 00:02:19.965
how much you can have this carbon emission permit.

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So what if your emission is more, if you emission more than

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what is allowance assigned to you, you need

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to buy the per permission

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if you buy the carbon permit in the market

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at much higher price.

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00:02:33.265 --> 00:02:36.085
So the overall emission is capped,

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that is cap and the trade.

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If you need more, you buy.

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But if you have extra, you can sell so that the market price

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of the carbon affect adjusted the,

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firm's usage in terms of emission.

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That is the emission system trading system.

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While there's evidence

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that et s can reduce carbon emission locally,

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there's always some pushback, though it's largely due

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00:03:00.045 --> 00:03:02.645
to something called carbon leakage.

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00:03:03.305 --> 00:03:07.805
What's that? So this happens when an ETS in one region make

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it very expensive for firms to emit carbon there.

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So those firms gonna relocate their emissions intensity

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activities to areas with looser or no regulations.

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00:03:20.225 --> 00:03:23.445
As a result, emission decrease in the ETS region,

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but increase elsewhere canceling out some

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00:03:27.125 --> 00:03:28.605
of the environmental benefits.

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So that is the pushback.

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For instance, there's journal articles published in the

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Journal of Financial Economics Economic Policy.

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They all document how firms can shift production across

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borders across the supply chains in response

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to the regulation on carbon pricing.

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This leakage effect reads question about the overall

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effectiveness of the ETS at global level,

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especially when it's implemented in a fragmented

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way in many local areas.

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They have different rules and different enforcement level.

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00:04:01.175 --> 00:04:04.525
Again, evaluating the effectiveness of ETS

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or carbon pricing instrument.

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00:04:06.115 --> 00:04:07.525
This is a global problem.

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00:04:08.155 --> 00:04:12.005
Just briefly explain what is ETS is ca and the trade.

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00:04:12.585 --> 00:04:14.725
In contrast, a carbon tax

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00:04:15.565 --> 00:04:19.285
directly charge a set fee perton of carbon emitted.

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00:04:20.105 --> 00:04:24.525
So our findings suggest that globally et s tend

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00:04:24.525 --> 00:04:28.045
to be more effective than carbon taxes in terms

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of reducing emissions.

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00:04:30.265 --> 00:04:31.965
For one, the impact

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00:04:31.985 --> 00:04:35.205
of ETS on carbon emissions is significantly

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00:04:35.225 --> 00:04:36.245
larger on average.

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00:04:37.065 --> 00:04:40.485
Second, when we look at the carbon taxes, a lot

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of the observed emission reduction actually occur

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00:04:43.985 --> 00:04:46.205
before the tax is even implemented.

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00:04:46.595 --> 00:04:50.645
This makes the harder to attribute those reduction emissions

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00:04:51.565 --> 00:04:53.605
directly due to the policy of the carbon tax.

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00:04:54.425 --> 00:04:55.645
But more importantly,

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it has has a clear impact on the energy usage,

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which I explained earlier.

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It shifts electricity generation away from fossil fuels

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to in and increase the share of the renewable energies.

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00:05:09.225 --> 00:05:12.965
Carbon tax, however, don't seem to achieve this same shift.

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00:05:13.395 --> 00:05:17.565
This makes the ETS not only better at reducing emissions,

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00:05:17.905 --> 00:05:21.925
but also more effective in driving a long-term transmission

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00:05:22.145 --> 00:05:23.525
to the cleaner energy.

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00:05:23.525 --> 00:05:27.165
There's often a heated debate in climate policy about

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00:05:27.165 --> 00:05:30.125
whether et s or carbon tax are more effective.

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00:05:30.125 --> 00:05:33.265
Which one is better? But based on our finding,

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00:05:33.485 --> 00:05:37.585
we think the focus on which instrument is better might be

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00:05:37.585 --> 00:05:39.025
the wrong question altogether.

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00:05:39.685 --> 00:05:44.425
So both two ETS and the carbon taxes have their strengths

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00:05:44.485 --> 00:05:47.745
and the weaknesses, and they can be designed very

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00:05:47.745 --> 00:05:49.705
differently depending on the context.

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00:05:50.615 --> 00:05:53.665
What really stand out from our study is

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00:05:53.665 --> 00:05:56.545
that it's the magnitude of these

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00:05:57.045 --> 00:05:58.965
Policies that truly makes a difference.

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00:05:59.425 --> 00:06:03.445
For example, the average carbon price in the ETS market in

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00:06:03.445 --> 00:06:06.445
the EU ETS market is currently about,

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00:06:06.445 --> 00:06:09.925
almost $70 per ton of the carbon it average

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00:06:10.225 --> 00:06:12.325
to $100 in 2023.

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00:06:12.865 --> 00:06:17.565
In contrast, the average carbon tax globally is far

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00:06:17.775 --> 00:06:19.725
below the $50 per ton,

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00:06:20.065 --> 00:06:24.525
and that gap in pricing likely explains why carbon taxes

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00:06:24.735 --> 00:06:26.685
often appear less effective.

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00:06:27.465 --> 00:06:30.205
So we found additional evidence suggesting

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00:06:30.205 --> 00:06:33.125
that if the countries raising the tax rates

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or expanding their coverage of the taxes, for example,

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00:06:37.555 --> 00:06:40.685
they like to include in taxes on more sectors

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00:06:40.745 --> 00:06:43.205
or emission resources, both channels,

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00:06:43.515 --> 00:06:46.325
they could make the carbon taxes significantly

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00:06:46.755 --> 00:06:47.765
more impactful.

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00:06:48.345 --> 00:06:53.245
So instead of asking which instrument is inherently better,

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00:06:53.585 --> 00:06:56.285
future climate policy should focus on

133
00:06:56.845 --> 00:06:58.005
strengthening the design

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00:06:58.305 --> 00:07:01.965
and the scale of these tools to make them work effectively.

Global Impact of Emissions Trading Systems on Carbon Reduction and Renewable Energy

00:00:00 - We are looking at how emissions trading system impact global carbon emissions and renewable energy usage. You might think there's so many research already on this topic. That's right. But there's been plenty of work usually on specific ETS markets. For example, the European unions ETS, the United States Regional Greenhouse Gas Initiative, or China's ETS here is the same. Most studies are region specific, but climate change,

00:00:33 - Anyway, we all share one sky. So you study how effectiveness in the local market, it doesn't tell you anything, how overall it has solving the problem globally. So in this paper, we pulled together data on the ETS policies from the 100 largest countries MA measured by their GDP in 2020. And this allow us to do the first global study on how the ETS policies impact emissions.

00:01:05 - to measure the effects after countries implementing ETS. So what we define two big things. First, the ETS adoption has led to significant reductions in emissions, about 12% for greenhouse gas and 18% for carbon dioxide. Second, ETS policies have pushed the countries to shift away from fossil fuels.

Transitioning to Renewables: The Impact of Emission Trading Systems

00:01:37 - by about 24%. While the renewable energy like wind, solar power, and this energies, their usage for electricity production has jumped by nearly 62%. So when governments tighten restrictions on carbon emissions through the ET s, it drives a clear transition from fossil fuels to the renewable, which is a key part of cutting emissions globally.

00:02:04 - has another name called the cap and the treat. What does it do is, they set up the total allowance in the system and then they allocate each of this firm how much you can have this carbon emission permit. So what if your emission is more, if you emission more than what is allowance assigned to you, you need to buy the per permission if you buy the carbon permit in the market at much higher price.

00:02:36 - that is cap and the trade. If you need more, you buy. But if you have extra, you can sell so that the market price of the carbon affect adjusted the, firm's usage in terms of emission. That is the emission system trading system. While there's evidence that et s can reduce carbon emission locally, there's always some pushback, though it's largely due to something called carbon leakage.

Challenges of Emissions Trading Systems: Carbon Leakage and Fragmentation

00:03:07 - it very expensive for firms to emit carbon there. So those firms gonna relocate their emissions intensity activities to areas with looser or no regulations. As a result, emission decrease in the ETS region, but increase elsewhere canceling out some of the environmental benefits. So that is the pushback. For instance, there's journal articles published in the

00:03:36 - They all document how firms can shift production across borders across the supply chains in response to the regulation on carbon pricing. This leakage effect reads question about the overall effectiveness of the ETS at global level, especially when it's implemented in a fragmented way in many local areas. They have different rules and different enforcement level. Again, evaluating the effectiveness of ETS

00:04:06 - This is a global problem. Just briefly explain what is ETS is ca and the trade. In contrast, a carbon tax directly charge a set fee perton of carbon emitted. So our findings suggest that globally et s tend to be more effective than carbon taxes in terms of reducing emissions. For one, the impact of ETS on carbon emissions is significantly

Examining Carbon Tax Impact and ETS Effectiveness

00:04:37 - Second, when we look at the carbon taxes, a lot of the observed emission reduction actually occur before the tax is even implemented. This makes the harder to attribute those reduction emissions directly due to the policy of the carbon tax. But more importantly, it has has a clear impact on the energy usage, which I explained earlier. It shifts electricity generation away from fossil fuels to in and increase the share of the renewable energies.

00:05:13 - This makes the ETS not only better at reducing emissions, but also more effective in driving a long-term transmission to the cleaner energy. There's often a heated debate in climate policy about whether et s or carbon tax are more effective. Which one is better? But based on our finding, we think the focus on which instrument is better might be the wrong question altogether.

00:05:44 - and the weaknesses, and they can be designed very differently depending on the context. What really stand out from our study is that it's the magnitude of these Policies that truly makes a difference. For example, the average carbon price in the ETS market in the EU ETS market is currently about, almost $70 per ton of the carbon it average

Enhancing the Effectiveness of Carbon Taxes

00:06:12 - In contrast, the average carbon tax globally is far below the $50 per ton, and that gap in pricing likely explains why carbon taxes often appear less effective. So we found additional evidence suggesting that if the countries raising the tax rates or expanding their coverage of the taxes, for example, they like to include in taxes on more sectors

00:06:58 - they could make the carbon taxes significantly more impactful. So instead of asking which instrument is inherently better, future climate policy should focus on strengthening the design and the scale of these tools to make them work effectively.

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