The European Union Emissions Trading System might yield large co-benefits from pollution reduction

Abstract

Mitigating greenhouse gas emissions and reducing air pollution represent two pressing and interwoven environmental challenges. While international carbon markets, such as the European Union emissions trading system (EU ETS), have demonstrated their effectiveness in curbing carbon emissions (CO2), their indirect impact on hazardous copollutants remains understudied. This study investigates how key toxic air pollutants - sulfur dioxide (SO2), fine particulate matter (PM2.5), and nitrogen oxides (NOx) - evolved after the introduction of the EU ETS with a comparative analysis of regulated and unregulated sectors. Leveraging the generalized synthetic control method, we offer an ex post analysis of how the EU ETS and concurrent emission standards may have jointly generated sizable pollution reductions in regulated sectors between 2005 and 2021. We provide an aggregate assessment that these pollution reductions could translate into large health co-benefits, potentially in the hundreds of billions of Euros, even when bounding the effect of emission standards. These order-of-magnitude estimates underscore key implications for policy appraisal and motivate further microlevel research around the health co-benefits of carbon abatement.