European Emission Trading System, Polluter Pays Principle, and Competition

We evaluate the effectiveness of the European Emission Trading System in distributing pollution prevention costs. By empirically analyzing a 2016 2020 panel of European installation, our analysis reveals discrepancies in the mechanism's ability to internalize costs across sectors. Such biases increase by narrowing the research focus on ind ustrial sectors. We find potential competitive advantages for sectors with higher extra European imports, affecting the single market competitive dimension. Such bias is only partially counterbalanced by extra European exports. Our results can aid policyma kers in limiting potential distortions to Europe's level playing field. It is necessary to complement the European Emissions Trading System with mechanisms capable of pricing emissions, regardless of their origin.