The Effectiveness of the Market-Based Environmental Policy Mix in the European Union

Abstract

The goal of this paper is to analyze the effectiveness of the environmental taxes and emissions trading in achieving cleaner production, that is, higher production per unit of emissions in the European Union (EU). The hypothesis of the paper is that the combined use of taxes and emission permits yields synergistic benefits in addition to their individual contributions. The paper uses panel analysis on the EU27 data from 2005 to 2012. The analysis does not robustly find positive effects from the interaction of these policy instruments, but it confirms that there are no negative ones. Additional interesting results are that, on average, (i) the effects of both instruments on production cleanliness are more beneficial at the regulated industries than at the national level, (ii) emissions trading is more effective than taxes, (iii) both instruments are more effective in the EU15 than in the EU12, and (iv) crisis did not significantly affect production cleanliness in the EU.

Key words: Effectiveness, Production cleanliness, Policy mix, Environmental taxes, EU ETS, Panel.

JEL: E60, H20, Q50.