Does the EU ETS cause carbon leakage in the manufacturing sector of Finland?

Abstract

Climate change is one, if not the most pressing issues of our time, and decreasing GHG emissions is vital in mitigating its impact. This thesis aims to determine if the EU ETS has a carbon leakage inducing effect on the manufacturing sector of Finland. The EU ETS is the main instrument of the EU to reach zero net emissions of GHG by 2050. The EU ETS’s purpose is to make polluting more expensive, which leads to con-cerns of firms relocating their operations to less stringent regions. These so-called pollution havens have been extensively covered in scientific literature but have not been convincingly demonstrated to exist in practice. The EU ETS has previously suf-fered from the insufficient price of carbon and the excessive allocation of free permits but seems to have started working as intended. By using regression analysis, I find that the implementation of the EU ETS has not led to an increase in net imports from sectors covered by the EU ETS, i.e., there is no observable carbon leakage caused by the EU ETS.