Does Pricing Carbon Mitigate Climate Change? Firm-Level Evidence from the European Union Emissions Trading Scheme

CRC TR 224, Discussion Paper No. 232

75 Pages Posted: 7 Jan 2021 Last revised: 17 Mar 2023

See all articles by Jonathan Colmer

Jonathan Colmer

University of Virginia

Ralf Martin

Imperial College London

Mirabelle Muûls

Imperial College Business School and Grantham Institute - Climate Change and the environment; London School of Economics - Centre for Economic Performance

Ulrich J. Wagner

University of Mannheim - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: February 27, 2023

Abstract

In theory, market-based regulatory instruments correct market failures at least cost. However, evidence on their efficacy remains scarce. Using administrative data, we estimate that, on average, the EU ETS -- the world's first and largest market-based climate policy -- induced regulated manufacturing firms to reduce carbon dioxide emissions by 14-16% with no detectable contractions in economic activity. We find no evidence of outsourcing to unregulated firms or markets; instead firms made targeted investments, reducing the emissions intensity of production. These results indicate that the EU ETS induced global emissions reductions, a necessary and sufficient condition for mitigating climate change. We show that the absence of any negative economic effects can be rationalized in a model where inattentive firms under-invest in energy-saving capital prior to regulation. Guided by the predictions of this model, we classify firms with low initial productivity or high energy intensity as potentially inattentive. We estimate larger reductions in emissions and increases in economic activity for those firms, consistent with regulation-induced cost savings or efficiency increases.

Keywords: cap-and-trade, carbon leakage, investment, climate policy

JEL Classification: Q54 Q58, H23, L50, F18

Suggested Citation

Colmer, Jonathan and Martin, Ralf and Muûls, Mirabelle and Wagner, Ulrich J., Does Pricing Carbon Mitigate Climate Change? Firm-Level Evidence from the European Union Emissions Trading Scheme (February 27, 2023). CRC TR 224, Discussion Paper No. 232 , Available at SSRN: https://ssrn.com/abstract=3725482 or http://dx.doi.org/10.2139/ssrn.3725482

Jonathan Colmer

University of Virginia ( email )

1400 University Ave
Charlottesville, VA 22903
United States

Ralf Martin

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Mirabelle Muûls (Contact Author)

Imperial College Business School and Grantham Institute - Climate Change and the environment ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

London School of Economics - Centre for Economic Performance ( email )

Houghton Street
London WC2A 2AE
United Kingdom

Ulrich J. Wagner

University of Mannheim - Department of Economics ( email )

D-68131 Mannheim
Germany

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