Firms’ Response to Climate Regulations-Empirical Investigations Based on the European Emissions Trading System

31 Pages Posted: 15 Jul 2024

See all articles by Fotios Kalantzis

Fotios Kalantzis

European Union - European Investment Bank

Salma Khalid

International Monetary Fund (IMF) - Fiscal Affairs Department

Alexandra Solovyeva

International Monetary Fund (IMF)

Marcin Wolski

European Union - European Investment Bank

Abstract

Using a novel cross-country dataset, which merges firm-level financials with information on firms’ participation in the European Unions’ Emissions Trading System (ETS), we investigate how firm performance is affected by tightening of environmental policies that put a price on pollution. We find that more stringent policies do not have a strong negative impact on the profitability of ETS-regulated or non-ETS firms. While firms report an increase in their input costs during periods of high carbon prices, their reported turnover is also higher. Among ETS-regulated firms which must purchase emission certificates under the EU ETS, tightening of climate policies in periods of high carbon prices results in increased investment, particularly in intangible assets. We establish robustness of our results using a quantile regression analysis, ensuring our key findings are not driven by distributional irregularities. Our findings provide support for the benefits of EU ETS on accelerating firms’ climate transition, while keeping firm-level financial costs at bay.

Keywords: climate finance, climate change, decarbonization, firm-level analysis, Emissions Trading System (ETS)

JEL Classification: C58, G32, Q51, Q56, Q58

Suggested Citation

Kalantzis, Fotios and Khalid, Salma and Solovyeva, Alexandra and Wolski, Marcin, Firms’ Response to Climate Regulations-Empirical Investigations Based on the European Emissions Trading System. IMF Working Paper No. 2024/135, Available at SSRN: https://ssrn.com/abstract=4890811 or http://dx.doi.org/10.5089/9798400282768.001

Fotios Kalantzis (Contact Author)

European Union - European Investment Bank

98-100 Boulevard Konrad Adenauer
L-2950
Luxembourg

Salma Khalid

International Monetary Fund (IMF) - Fiscal Affairs Department ( email )

700 19th Street, NW
Washington, DC 20431
United States

Alexandra Solovyeva

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Marcin Wolski

European Union - European Investment Bank ( email )

98-100 Boulevard Konrad Adenauer
L-2950
Luxembourg

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