Firm-Level Competitiveness Effects of the EU ETS: Evidence from Spain

Abstract

The EU Emissions Trading System is the cornerstone of Europe's strategy to comply with the Kyoto Protocol and lower its greenhouse gas emissions sufficiently to meet climate goals. Since its implementation in 2005, researchers have sought to not only determine the program's effectiveness in reducing carbon emissions, but also the potentially adverse economic consequences for regulated entities. I study the economic performance of regulated and unregulated firms in Spain, a heavily credit-constrained country whose firms have operated in a deteriorated economic enviroment for a prolonged period of time. Using a difference-in-difference methodological approach, I find regulated Spanish firms benefitted from higher revenues, employment levels, and fixed asset stocks compared to their unregulated counterparts. I also investigate potential channels driving these effects, and find that access to debt is a particularly important factor to consider in the context of Spain. A closer look at the dominant ETS sector in Spain, ceramics and clay production, shows that despite fierce external and internal competition, the sector's ETS firms thrived in particular. 

Keywords: European Emissions Trading System, environmental policy, difference-in-differences, competitiveness, Spanish economy

JEL Classification: Q52, Q54, Q58