How ENTRACTE will contribute to advance the state of the art

The ENTRACTE project is to our knowledge the first broad and coherent analysis of climate policy instruments and their interactions. The comprehensive approach used in this project, as well as the use of the whole range of economic analysis tools, allows identifying if different climate policy options are complementary, or rather supplementary in terms of environmental effectiveness, and economic efficiency, and feasibility.

Innovative output 1: An integral assessment of climate policy instruments.

Based on the common set of assumptions and policy scenarios developed in WP1, a mix of different research approaches (econometric analysis, theoretical analysis, experimental analysis, and numerical modelling) will be used to assess the different policy instruments. The novelty of this approach rests on the integration of different research methods, each of which will provide solid conclusions and insights in a specific aspect of the problem. The ENTRACTE project is innovative in that it truly integrates empirical and theoretical findings.

With respect to the EU ETS, there is certainly a void to be filled in the econometric literature. The ENTRACTE project will conduct the first comprehensive ex-post analysis of the impact of the EU ETS on industrial emissions and on other outcome variables using detailed firm-level data for several European countries.

In addition, a lot of the current EU climate policy making, for example, regarding competitiveness and leakage risk rests more on assumptions rather than on direct empirical evidence. ENTRACTE will provide further evidence on how policies perform on the basis of micro data, e.g. on the actual leakage risk. This will result in more comprehensive policy recommendations.

Innovative output 2: A deep understanding of how climate policy instruments interact with each other and with related policy instruments.

Making use of methods to assess real-world outcomes (econometric analysis) and theoretical predictions (econometric and experimental analysis), as well as methods to deepen understanding (theoretical analysis) and assess impacts of instruments not yet implemented (numerical modelling) will result in a comprehensive and well-rounded analysis of the interactions of emissions trading, energy efficiency standards, and energy efficiency policies.

As explained in the section above, little evidence is available on how technological development serves as a springboard for more stringent climate policy in Europe by lowering the costs of reducing emissions. ENTRACTE will extend this methodology and provide evidence of these interactions for EU countries, with a particular focus on the role of the EU ETS.

The thorough investigation of Border-Tax-Adjustments (BTA) and a comparison of the existing literature on this topic with salient empirical evidence which will be carried out within the ENTRACTE project is clearly a move beyond the current state-of-the-art. Moreover, a crucial question to be addressed is how trade measures such as a BTA affect the incentive of European or foreign firms to invest in low-carbon innovation and to adopt emission-reducing technologies. Such a novel approach will clearly push the research frontier in this area.

Innovative output 3: An economic analysis of policy instruments that explicitly takes practical barriers into account.

To become relevant for policy-making, economic analysis must consider the key existing impediments to single instrument policies. It must also acknowledge that these impediments can never be fully eliminated, thus making it impossible to implement first-best policies. The political, legal, and practical feasibility of different policy options have to be carefully considered. With respect to the research questions addressed in the ENTRACTE project, the academic state-of-art often does not currently fulfil this criterion. This will be another innovative feature of the ENTRACTE project in that it provides policy relevant, research-based and “ready-to-use” results.

The ENTRACTE project integrates economic analyses on instrument choice with those of policy scientists. The various distortions and inefficiencies that typically characterize modern economies will thus be accounted for, and the analyses by economists will be compared to and complemented by those of political scientists. Moreover, the analysis carried out within the ENTRACTE project will not be solely limited to traditional top-down instruments like environmental taxes or tradable permit systems, but will also encompass more participatory instruments like eco-labelling, environmental disclosure policies, and corporate social responsibility. All instruments will be evaluated with respect to their effectiveness, efficiency, legitimacy, and fairness criteria. This will result in a ranking of the various policy instruments with respect to each specific criterion.

Furthermore, the project incorporates behavioural aspects into the assessment of policy instruments by investigating how people perceive the efficiency, fairness and legitimacy of different instruments in controlled lab environments. A lab setting will also allow investigating how people respond to a restricted choice of instruments or to directed future public choices when commitment is difficult. By taking the “real-world” and its imperfections comprehensively into account, the ENTRACTE project makes a major step in providing practically applicable policy recommendations.

Innovative output 4: Identify instrument mixes that enable a more efficient and effective climate policy.

The insights in the interactions and synergies of climate and environmental policy gained from the different research approaches will provide well-rounded and solid guidelines to identify the optimal mixes of policy instruments. We will summarize which combinations of climate, innovation and trade policies form feasible policy options. This provides a novel, unique, and comprehensive framework to identify effective and efficient policy options. It allows for a consistent synthesis of results and a relevant assessment of the factors that most heavily constrain policy-making from a practical point of view.