Beyond CO₂: unintended spillover effects of emissions trading on fugitive methane via supply chains

Emissions trading systems (ETS) have become a central policy instrument for reducing downstream CO₂ emissions, yet their ability to influence upstream fugitive emissions remains less well understood. Using sector-disaggregated CO₂ and fugitive emission data for G20 economies from 1990 to 2023, this study examines the impacts of ETS adoption across six major emitting sectors within a staggered difference-in-differences framework. The results indicate that ETS implementation is associated with substantial reductions in downstream CO₂ emissions, which typically emerge after a 1–2 year lag. The abatement dynamics are highly heterogeneous: the power and transport sectors respond relatively rapidly (within one year), whereas the building sector adjusts more gradually, with effects taking up to a decade to fully materialize. With respect to upstream fugitive emissions, dominated by methane, we find evidence of a statistically significant decline following ETS adoption. However, we interpret this reduction as a behavioral spillover primarily driven by indirect fossil energy demand contraction, rather than as the result of explicit institutional governance of methane emissions. These findings suggest that while ETS can generate cross-segment spillover effects, its effectiveness remains conditional and bounded by its CO₂-centric design. They further highlight the importance of considering methane monitoring, reporting, and verification (MRV), as well as targeted upstream instruments, in future discussions on the evolution of carbon market frameworks.