Why does emissions trading under the EU Emissions Trading System (ETS) not affect firms’ competitiveness? Empirical findings from the literature

Environmental policies may have important consequences for firms’ competitiveness or profitability. For the European Union Emissions Trading Scheme (EU ETS) the empirical literature documents significant emissions reductions. Surprisingly there have been hardly any concurrent negative effects on firms’ competitiveness during the first two phases of the scheme (2005-2012). We explain this finding in detail while also arguing about likely future effects of the scheme in later periods (2012-2030). We show that the main explanations for this finding are a large over- allocation of emissions allowances leading to a price drop and the ability of firms to pass costs onto consumers in some sectors. Over-allocation seems to be mainly attributable to the design of the scheme and compensations granted to firms. Cost pass-through combined with free allocation, in turn, partly generated windfall profits. In addition, the relatively low importance of energy costs indicated by their average share in the budgets of most manufacturing industries may limit the impact of the EU ETS. Finally, small but significant stimulating effects on innovation have been found so far. Several factors suggest that over-allocation is likely to remain substantial in the upcoming periods of the scheme. Therefore, we expect to see no negative competitiveness effects from the EU ETS in Phases III and IV (2013-2030). Thus we see no need for further reliefs for the average regulated firm.

Joltreau, Eugénie and Katrin Sommerfeld (2019), Why does emissions trading under the EU Emissions Trading System (ETS) not affect firms’ competitiveness? Empirical findings from the literature, Climate Policy 19(4) , 453-471