THE EU EMISSION TRADING SYSTEM AND TRADE WITH THIRD PART COUNTRY Quantitative evidence from Africa and Asia

Abstract

This thesis examines whether the European Union Emissions Trading System (EU ETS) has influenced bilateral manufacturing imports from third countries through trade diversion mechanisms. To capture heterogeneous exposure to carbon pricing, ETS exposure is measured as the interaction between the EU ETS allowance price and exporter-specific carbon intensity. The empirical analysis applies a structural gravity framework, a standard approach for analysing bilateral trade flows, estimated using Poisson pseudo-maximum likelihood (PPML). The results indicate a negative association between ETS exposure and EU imports on the baseline specification, consistent with trade diversion along the carbon-intensity dimension. However, the magnitude and statistical significance of this effect are sensitive to the fixed-effects structure, suggesting that ETS-induced trade effects operate primary through relative competitiveness within existing trade relationships rather than through aggregate trade contraction.