The role of EU-ETS Mechanism as Environmental Investment Promoter in Europe and Developing Countries

Abstract

This research attempts to provide a better understanding about the role of the European Union Emission Trading System (EU-ETS) as private environmental investment promoter. It explores the macroeconomic behavior of private environmental investments before and after the implementation of EU-ETS in 2005 until the end of Phase I of the mechanism. Also, private environmental investments are contrasted with variables like: economic growth, interest rates, and energy prices (gas and electricity) in order to quantify the impact of these on private environmental decisions and evaluate the level of impact (slow, moderate and strong) of all these variables together with the EU-ETS implementation on private environmental investment decisions. For this purpose it is used a statistical approach through multiple linear regressions for the cases of Germany, Spain, France and The Netherlands and a single panel estimation with data information of all the countries mentioned. The results show that the signature of Kyoto Protocol in year 1997 -as a preamble of EU-ETS- provided a perverse incentive on private environmental investments until 2004. During Phase I (2005–2007) of the EU-ETS mechanism, private environmental investments showed an important positive recovery that was not enough to reach pre Kyoto Protocol levels. Finally, it is analyzed the investment in developing countries through CDM projects.