Semiparametric Estimation of European Climate Policy Effects (EU ETS)

The European Union Emissions Trading System (EU ETS) has become the cornerstone of the European Union’s strategy to decarbonize the economy and mitigate climate
change. Following these objectives, the aim of this paper is to assess the impact of the price of carbon, which is linked to the European market of allowances, on carbon dioxide emissions. To do so, we propose an econometric model that extends the
Environmental Kuznets Curve (EKC) model in several directions. First, the price of carbon, which is the policy variable, is introduced in the model in a nonparametric
fashion; Second, we propose to use an interactive fixed effects approach to control for latent heterogeneities in both dimensions of panel data; Third, to allow for spatial dependence, we introduced spatially correlated errors. The extended EKC model poses various challenges for estimation. To cope with them, using a profile likelihood approach,
we propose a Feasible Generalized Least Squares estimator of the parameters of interest. Furthermore, the policy effects curve is also efficiently estimated. The asymptotic properties of the estimators are shown and, based on these outcomes, we
empirically evaluate the policy effects. Our approach yields significantly different and more meaningful results compared to those obtained using standard estimation techniques.