Searching for a Carbon Laffer Curve: Estimates from the European Union Emissions Trading System

Abstract

Carbon prices have grown remarkably in the European Union (EU) Emissions Trading System (ETS) in recent years, raising distributional concerns. Revenues are expected to grow with higher carbon prices, thus providing resources to address distributional issues. Beyond a certain point, however, higher prices can discourage the purchase of allowances and ultimately reduce revenues, describing a Carbon Laffer Curve (CLC). We empirically investigate the CLC in the EU ETS between 2012 and 2021 using auction revenues at the country level. Results indicate that ETS revenues follow an inverted-U relationship in both the volume and the price of auctioned allowances, with an estimated optimal price between 86 and 125 euros.