Who pays for the EU Emission Trading System? The risk of shifting tax burden from firm to final consumer

This paper aims to analyze the relationship between the net price of different fuels in the Italian market and European Union emission allowances during Phase 2, 3, and part of Phase 4 (2008–2023), with each energy price considered as the dependent variable. Considering the Emission Trading System as a peculiar European tax regime, the empirical findings show the presence of a cointegrating relationship between the price of the allowances and energy prices, which reveals a shifting of the tax burden from firm to final consumer. To achieve this objective, the CCR (Canonical Cointegration Regression) has been estimated for the variables showing cointegration with the Emission Trading System allowances, as determined by the results of the Gregory-Hansen test. Time-Varying Granger Causality tests reveal that EU emission allowances Granger cause all the dependent variables, at least a 5 % significance level. • Net prices of gasoline, LPG and heavy fuel are cointegrated with the price of ETS. • A change in the price of ETS has a positive effect on the energy net prices. • Energy net prices are Granger caused by the price of the ETS allowances. • Presence of risk of a shifting of the price of ETS from firm to final consumer.