Carbon prices and emission intensity: role of autonomous improvements and price-driven changes

Abstract

ABSTRACT An improvement in emission intensity for a production process can be achieved either by technological improvements that support lower carbon footprint or by fuel substitution. The prevailing prices of carbon emission allowances motivate the emitters’ decision. In this paper, we examine the interrelationship between the prices of carbon emission allowances and the expected emission intensity in future periods after accounting for common factors representing business cycle innovations. Using data from phase three of the emission trading system in the European Union, we provide evidence that improvements in emission intensity driven by higher prices of carbon emission allowances have low persistence. We also report that the autonomous technological improvements have a durable effect on emission intensity in the future periods. Our findings have important policy implications. Our results highlight the importance of technological improvements for sustained improvements in emission intensity.