Is there a macroeconomic carbon rebound effect in EU ETS?

Abstract

This study examines the macroeconomic carbon rebound effect for the European Union (EU) Emissions Trading System (ETS) by using data for the 2005–2019 period for 26 European countries. We estimate the panel data models which link emissions to allowances by controlling for economic growth, investment, employment, and energy intensity. The results from both the recent panel estimation approaches and Granger causality analysis indicate a macroeconomic carbon rebound effect of the EU ETS. The bidirectional Granger causality between emissions and allowances highlights a self-enforcing macroeconomic rebound. Energy intensity significantly impacts emissions directly and indirectly via the macroeconomic rebound effect. Our results show that positive economic spillovers of ETSs may hamper the efforts to meet climate targets. © 2023 The Authors