Cap-and-trade and produce at least cost? Investigating firm behaviour in the EU ETS

Maja Zarkovic ()
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Maja Zarkovic: University of Basel

Working papers from Faculty of Business and Economics - University of Basel

Abstract: A persistent concern in the literature on climate policy is that the emissions abatement, which is achieved via environmental regulation, has potentially adverse affects on firms' economic performance. I investigate this issue in the context of the European Union Emissions Trading Scheme (EU ETS) and the German manufacturing sector. My investigation uses confidential data from an administrative firm-level production census. As a measure of the economic performance, I estimate cost efficiencies and their determinants for narrowly defined industries with a stochastic cost frontier (SCF) analysis. In order to directly compare cost efficiencies across treatment groups, I use a stochastic meta frontier (SMF) analysis. I provide additional evidence of the causal impact of the EU ETS on various types of firms` costs with a difference-in-differences (DD) framework. My results indicate that the EU ETS regulation has resulted in a small but significant increase in costs across the German manufacturing sector. This increase is driven mostly by an increase in energy and capital costs. I demonstrate that the potential to increase cost efficiency exists for most industries in the German manufacturing sector. The analysis of the drivers of cost efficiency confirms that in most industries, exporting firms are more cost efficient than their counterparts. In contrast, the results show that innovating firms and firms that are regulated by the EU ETS are less cost efficient than unregulated firms.

Keywords: Stochastic Frontier Analysis; Meta Frontier Analysis; EU ETS; Manufacturing Sector (search for similar items in EconPapers)
JEL-codes: D22 D24 N64 Q52 (search for similar items in EconPapers)
Date: 2020-09-30
New Economics Papers: this item is included in nep-eff, nep-ene, nep-env and nep-reg
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Persistent link: https://EconPapers.repec.org/RePEc:bsl:wpaper:2020/12

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