Carbon pricing and decoupling between greenhouse gas emissions and economic growth: A panel study of 29 European countries, 1996–2014

This study explores why the levels of decoupling between greenhouse gas (GHG) emissions and economic growth vary across time and countries by examining to which extent carbon pricing instruments are driving this decoupling. We expect that the implementation of carbon pricing instruments facilitates decoupling, as they are designed to achieve cost-efficient GHG reduction. We analyze a panel data of 29 European countries between 1996 and 2014 to examine the relationships between two carbon pricing instruments (emission trading (ETS) and carbon tax) and emission intensity (GHG emissions per unit of GDP) which we use to measure decoupling trends. Results from two-way fixed effects models show that emission trading contributes to decoupling, whereas our evidence does not support the role of carbon tax. Furthermore, emission trading is negatively associated with both emission intensity and GHG emissions, implying that it contributes to strong decoupling. Using coarsened exact matching (CEM), our results suggest that even a single emission trading policy (e.g., EU-ETS) across different jurisdictions may render a heterogeneous effect on decoupling depending on their socioeconomic conditions.