Economic Impacts of Carbon Emissions Trading Systems

Carbon emissions trading systems (ETS) are market-based instruments designed to limit greenhouse gas emissions by setting a cap on total emissions and allowing regulated entities to trade allowances. By putting a price on carbon, ETS frameworks influence investment decisions, production costs and consumption patterns, thereby internalising the environmental cost of emissions. Economic impacts are multifaceted: at the macro level, an ETS can alter GDP growth, trade balances and fiscal revenues through auctioning or allocating allowances; at the sectoral level, differential effects emerge as energy-intensive industries face higher compliance costs while low-carbon sectors may expand. Revenue-recycling mechanisms—such as reductions in income tax or targeted subsidies—can mitigate adverse welfare effects and redistribute gains more equitably. International linkages in trading schemes can lower global abatement costs and foster cooperation but may also raise concerns about carbon leakage and competitiveness. Overall, robust ETS design—including cap stringency, allocation rules, price floors and coverage scope—is critical to balancing environmental ambition with economic resilience and to driving long-term innovation in low-carbon technologies.

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Economic Impacts of Carbon Emissions Trading Systems publication trend

The graph below shows the total number of articles in economic impacts of carbon emissions trading systems across all publications each year (not limited to Nature Index journals).

Technical terms

Cap-and-trade system: A market mechanism that sets a limit on total emissions and allows participants to buy and sell emission allowances.

Computable general equilibrium (CGE) model: An economic modelling framework that simulates how economies respond to policy changes across sectors and agents.

Emission abatement cost (EAC): The cost incurred to reduce an additional unit of emissions within a given scheme.

Marginal cost savings (MCS): The reduction in total abatement cost achieved by including an additional sector in the trading system.

Nationally determined contributions (NDCs): The emissions reduction pledges submitted by countries under the Paris Agreement.

References

1. Impacts of emission trading scheme in Vietnam: A perspective of revenue redistributions. Sustainable Development (2024).
2. The role of sectoral coverage in emission abatement costs: evidence from marginal cost savings. Environmental Research Letters (2022).
3. Will international emissions trading help achieve the objectives of the Paris Agreement?. Environmental Research Letters (2016).