The E.U.’s Emissions Trading Scheme: Pros, Cons, and U.S. Viability

By Joshua Walker — February 11, 2022

In 2005, the European Union introduced a carbon credit system called the Emissions Trading Scheme (E.T.S.) to reduce member states’ contributions to climate change. The system capped emissions for certain industries and allowed businesses to trade unused allowances. Each year, the cap reduces by 1.7%, decreasing total emissions across the E.U. The E.T.S. encourages more efficient, environmentally friendly production while using market forces to control emissions.

However, the system is not perfect. Economist Dr. Peter Heindl notes that smaller trades incur proportionally higher transaction costs than larger ones, negatively affecting small firms. For example, doubling emissions from 5,000 tCO2 to 10,000 tCO2 reduces average transaction costs by 50%, while increases among large emitters produce little difference. This has led to inefficiencies favoring larger firms, though total emissions remain capped. Studies by Jūratė Jaratė, Frank Convery, and Corrado Di Maria indicate that efficiency losses reach 10-20%, and the absence of transaction costs could increase trading by 12-32%. Despite shortcomings, the E.T.S. has reduced European emissions by 3.8% between 2008 and 2016 (Bayer & Aklin).

The U.S. has not adopted a similar system for several reasons. Social attitudes in the U.S. emphasize individualism, making collective climate action difficult. Research comparing the U.S., China, and Poland shows that collectivist attitudes correlate with stronger climate policies. China's active emission reductions reinforce this notion, while U.S. individualism slows adoption. President Biden’s 2030 emission reduction plan represents a shift toward collective policy but faces historical resistance from prior administrations.

Nevertheless, measuring collectivism is challenging. Comparisons between countries indicate correlation but not causation. For example, Denmark may be more collectivist than the U.S., but its policies may focus on public welfare rather than environmental regulation. Therefore, social attitudes alone do not fully explain climate policy outcomes.

Another factor is the U.S. federal election system. Single-member district elections favor a two-party system, requiring compromises that can slow progressive policy implementation, including climate initiatives. In contrast, multi-member district systems in Europe allow more diverse representation and policy proposals. Collectivist attitudes and electoral structures together likely explain why the U.S. has not adopted a system similar to the E.U.’s E.T.S.

Finally, government interventions like a carbon credit system may reduce industrial output and increase unemployment, discouraging policymakers. While Europe implemented the E.T.S. despite similar challenges, the U.S. political culture, historical individualism, and electoral constraints have slowed adoption.

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