The joint impact of the European Union emissions trading system on carbon emissions and economic performance

Abstract

This paper investigates the joint impact of the European Union Emissions Trading System (EU ETS), Europe’s main climate change policy, on carbon emissions and economic performance of regulated companies. The impact on emissions is analysed using installation-level carbon emissions from national Polluting Emissions Registries from France, Netherlands, Norway and the United Kingdom complemented with data from the European Pollutant Release and Transfer Register (E-PRTR). The impact on firm performance is analysed using firm-level data for all countries covered by the EU ETS. A matching methodology exploiting installation-level inclusion criteria combined with difference-in-differences is used to estimate the policy’s causal impact on installations’ emissions and on firms’ revenue, assets, profits and employment. We find that the EU ETS has induced carbon emission reductions in the order of -10% between 2005 and 2012, but had no negative impact on the economic performance of regulated firms. These results demonstrate that concerns that the EU ETS would come at a cost in terms of competitiveness have been vastly overplayed. In fact, we even find that the EU ETS led to an increase in regulated firms’ revenues and fixed assets. We explore various explanations for these findings.