The Evolution of Emission Trading Systems: A Quantitative Assessment of the Effectiveness of EU ETS2

Climate change presents a critical global challenge, prompting the development of market-based solutions such as Emission Trading Systems (ETS) to curb greenhouse gas (GHG) emissions. This thesis investigates the evolution and effectiveness of such mechanisms, with a focus on the European Union's ETS and its forthcoming extension, the EU ETS2, set to begin in 2027. While the original EU ETS has been instrumental in reducing emissions from power generation and heavy industry, EU ETS2 represents a paradigm shift by incorporating the road transport and building sectors, previously governed under national policies, into a harmonized European carbon pricing framework. The research follows a structured approach: it first contextualizes the creation and evolution of global and regional ETS mechanisms, then offers a detailed exploration of the EU ETS, its phases, and innovations such as the Market Stability Reserve (MSR) and the Carbon Border Adjustment Mechanism (CBAM). Subsequently, it introduces EU ETS2, highlighting its legal basis, regulatory structure, and differences from the original system, including its upstream design, full auctioning of allowances, and embedded social safeguards such as the Social Climate Fund. A quantitative methodology is employed to assess two key hypotheses: the impact of EU ETS2 on carbon prices and its effectiveness in reducing GHG emissions. Using empirical data, the thesis applies regression models and comparative analysis to evaluate anticipated trends before and after implementation. The findings contribute to the academic and policy debate on the efficacy and design of carbon markets. They provide insights into how an expanded and more inclusive ETS could foster long-term decarbonization, promote innovation, and enhance cost-efficiency in sectors that have traditionally been harder to regulate. While the study acknowledges limitations in predictive modeling, it underscores the potential of EU ETS2 to advance the European Green Deal objectives and to serve as a model for future international carbon pricing strategies.