Abstract
Does a unilateral climate change policy cause companies to shift the location of production, thereby creating carbon leakage? In this paper, we analyze the effect of the European Union Emissions Trading System (EU ETS) on the geographic distribution of carbon emissions by multinational companies. The empirical evidence is based on unique data for the period 2007–2014 from the Carbon Disclosure Project, which tracks the emissions of multinational businesses by geographic region within each company. Because they already operate from multiple locations, multinational firms should be the most prone to carbon leakage. Our data includes the regional emissions of 1,122 companies, of which 261 are subject to EU ETS regulation. We find no evidence that the EU ETS has led to a displacement of carbon emissions from Europe toward the rest of the world, including to countries with lax climate policies and within energy-intensive companies. A large number of robustness checks confirm this finding. Overall, the paper suggests that modest differences in carbon prices between countries do not induce carbon leakage.
Highlights
With the implementation of the European Union Emissions Trading System (EU ETS) and a range of other policies supporting the deployment of low-carbon technologies such as renewable energy, the European Union is widely perceived as the vanguard of climate change policy globally
We focus on the concern that EU climate policy, its flagship EU Emissions Trading System could lead to carbon leakage, i.e. firms could re-locate polluting activities to non-EU locations in response to being subjected to the EU ETS
Our results suggest that carbon leakage due to the EU ETS is unlikely to have been an economically meaningful concern until 2014
Summary
With the implementation of the European Union Emissions Trading System (EU ETS) and a range of other policies supporting the deployment of low-carbon technologies such as renewable energy, the European Union is widely perceived as the vanguard of climate change policy globally This unilateral set of policies has raised concerns that EU governments are threatening the international competitiveness of Europe-based companies, in particular in carbon and energy intensive industries. The relocation of economic activity toward less-regulated regions means that the policy is ineffective from a climate change point of view, as emissions are likely relocating with production rather than being reduced, and costly from an economic point of view, by destroying jobs and economic activity in the more strictly regulated countries This issue has been referred to as “carbon leakage” and has attracted a lot of attention both on the policy arena and in the recent literature (see Branger and Quirion (2014) and Fowlie and Reguant (Forthcoming) for recent reviews)
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