Domestic Politics in the European Union’s Emissions Trading System: Evidence from Free Allowance Allocation

How do leaders determine to whom to target the benefits of new environmental policies? When the European Union first rolled out its Emissions Trading System in 2005, a cap-and-trade system that is the world’s largest carbon market regulating 40% of EU emissions, national governments commanded significant leeway in determining the distribution of pollution permits to emitters. The allocation of “free allowances” represented a choice to distribute a sizable economic asset, along with the ability to pollute for free under the new system. This paper describes the provision of free allowances over time and examines whether leaders provided greater free allowances to emitting installations located in politically consequential places. I find that, in the United Kingdom, installations located in more marginal electoral constituencies received more free allowances on average than installations located in less marginal districts. While consistent with theoretical expectations, the effect is not statistically significant.