Electricity trading and its effects on global carbon emissions: A decomposition analysis study

The emissions trading system is one of the primary instruments of the European region to achieve emissions reduction targets. As an alternative, some scholars investigate the potential role of electricity trading on emissions reduction as well. Acknowledging the fact that renewable sources and technical expertise may be concentrated in a few geographical areas, cross-border electricity trading provides a means to exploit these renewable resources, and therefore increase the potential for cleaner production of electricity. In the research presented in this paper, we decompose the effects of electricity trading to changes in CO2 emissions of the top 20 electricity trading countries in the European region. We compare the contributions of electricity imports and exports to changes in carbon emissions with those of traditional drivers, e.g. energy intensity, economic activity and population growth. A novel identity function was formulated in this paper to include the effects of electricity imports and exports in the decomposition analysis, using the logarithmic mean divisia index. Our results show that the European region offset approximately 10.3 MtCO2 from 1990 to 2014 due to electricity trading. This is because of large clean energy exports from France, Sweden and Switzerland. However, some countries have been adversely affected by electricity exporting, significantly increasing their emissions. In some countries, the increases in carbon emissions due to electricity exporting even outweighed increases due to population growth. To conclude, we discuss policy and wider implications for sustainable practice of electricity trading in the context of emissions reduction.