Coase and Cap-and-Trade: Evidence on the Independence Property from the European Carbon Market

Abstract

I examine the Coasean independence property in a large multinational cap-and-trade scheme for greenhouse gas emissions, the EU Emissions Trading System. I analyze whether emissions of power producers are independent from allowance allocations by leveraging a change in allocation policy for a difference-in-difference strategy. The evidence suggests that the independence property holds overall and for larger emitters and that firms respond to the loss in allocation by increasing allowance purchases. Suggestive evidence for small emitters indicates that trading costs or behavioral bias distorts their emission decisions. However, their small emission share leaves the independence property intact at the sector level.