The effect of the EU ETS on the environmental and productive performance of EU public power plants

This study explores whether the European Union’s CO2 Emissions Trading Scheme (EU ETS) could provide incentives for the public power plants responsible for about one third of EU-27 CO2 emissions, to improve their environmental and productive performance. The existing ex post literature only partially addresses this issue productive performance is measured partially, or environmental performance is neglected. This paper develops an approach for measuring the overall impact of the EU ETS on the public power plants of the EU member states during 1996-2007. Firstly, it measures environmental efficiency and total factor productivity growth taking into account environmental variables. For this purpose, Data Envelopment Analysis is used as the principle methodological base. Secondly, the impact of the EU ETS, fossil fuel prices and other variables on the environmental efficiency and productivity indicators are estimated by using econometric techniques. Two findings emerge from this analysis: i) the EU ETS had a positive effect on the environmental efficiency and technical change of the public power plants; however, ii) the looseness of this policy reflected in the overallocation of the grandfathered permits led to the deteriorating performance. Work in progress, do not quote!