Going Green by Putting a Price on Pollution: Firm-level Evidence from the EU

50 Pages Posted: 11 Jan 2021

See all articles by Olivier De Jonghe

Olivier De Jonghe

Tilburg University - Department of Finance; National Bank of Belgium - Research Department; Tilburg University - European Banking Center

Klaas Mulier

Ghent University - Faculty of Economics and Business Administration

Glenn Schepens

European Central Bank (ECB); European Central Bank (ECB)

Date Written: October 6, 2020

Abstract

This paper shows that, when the price of emission allowances is sufficiently high, emission trading schemes improve the emission efficiency of highly polluting firms. The efficiency gain comes from a relative decrease in emissions rather than a relative increase in operating revenue. Part of the improvement is realized via the acquisition of green firms. The size of the improvement depends on the initial allocation of free emission allowances: highly polluting firms receiving more emission allowances for free, such as firms on the carbon leakage list, have a weaker incentive to become more efficient. For identification, we exploit the tightening in EU ETS regulation in 2017, which led to a steep price increase of emission allowances and made the ETS regulation more binding for polluting firms.

Keywords: Climate Change, Climate Regulation, Emission Trading System, Firm Behaviour, M&A

JEL Classification: D22, G34, G38, Q53, Q54

Suggested Citation

De Jonghe, Olivier and De Jonghe, Olivier and Mulier, Klaas and Schepens, Glenn and Schepens, Glenn, Going Green by Putting a Price on Pollution: Firm-level Evidence from the EU (October 6, 2020). Available at SSRN: https://ssrn.com/abstract=3725061 or http://dx.doi.org/10.2139/ssrn.3725061

Olivier De Jonghe

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
0031-13-466.2650 (Phone)

National Bank of Belgium - Research Department ( email )

Research Department
Boulevard de Berlaimont 14
B-1000 Brussels, 1000
Belgium

Tilburg University - European Banking Center ( email )

PO Box 90153
Tilburg, 5000 LE
Netherlands

Klaas Mulier (Contact Author)

Ghent University - Faculty of Economics and Business Administration ( email )

Ghent, B-9000
Belgium

Glenn Schepens

European Central Bank (ECB) ( email )

Financial Research
Sonnemannstrasse 20
Frankfurt am Main, D-60314
Germany

HOME PAGE: http://https://sites.google.com/site/schepensglenn

European Central Bank (ECB) ( email )

Frankfurt am Main
Germany

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