Coase and cap-and-trade : evidence on the independence property from the European electricity sector

This paper provides an empirical test of the Coase Theorem. I analyze whether emissions are independent from allowance allocations in the electricity sector as regulated under the EU's Emissions Trading System (EU ETS). Exogenous variation in levels of free allocation for power producing installations enables a difference-in-differences strategy. I find that the change in allocations generally does not affect installations' emissions, although temporary effects may exist for some small emitters. The analysis suggests that policy makers may use free allocation in the political bargaining process without compromising cost- effectiveness of the cap-and-trade program.