Indirect cost compensation under the EU ETS: A firm-level analysis

Abstract

Decarbonisation implies conversion to electrification with a subsequent increase in electricity consumption. The EU Emission Trading System (EU ETS) compensates firms for the higher electricity costs. We exploit sectoral and country differences in regulation and a unique dataset on beneficiaries to evaluate the impact of EU ETS indirect cost compensation on the performance of aided firms. Receiving compensation for indirect costs does not have a statistically significant impact on labour productivity. Conversely, there is evidence of a negative performance in terms of turnover, value of total assets and employment of beneficiaries. Results suggest that the amounts transferred to firms might not fully compensate for the higher cost of energy in aided countries. However, the negative effects fade in sectors more exposed to carbon leakage risk. As far as aid intensity is concerned, estimates imply that higher compensation amounts improve performance.