Why the EU ETS needs reforming: an empirical analysis of the impact on company investments

Åsa L�fgren, Markus Wr�ke, Tomas Hagberg and Susanna Roth

Climate Policy, 2014, vol. 14, issue 5, 537-558

Abstract: The European Union's Emissions Trading Scheme (EU ETS) is so far the largest emissions trading system in the world. A rigorous ex post empirical analysis of the scheme is presented. The effect of the scheme on firms' investment decisions in carbon-reducing technologies is analysed by using detailed firm-level data from Swedish industry. Based on difference-in-difference estimation as well as a before-after difference estimation, the results reveal that the EU ETS has not had a significant effect on firms' decisions to invest in carbon-mitigating technologies. However, although the EU ETS appears to have no direct effect on investments, it is too early to dismiss the system. Consideration is given to how the EU ETS can realize its potential to become an effective tool in the EU climate and energy policy portfolio. Policy relevance A thorough analysis and discussion considers the ability of the EU ETS to create strong incentives for investment in carbon-reducing measures. The empirical results (using detailed firm-level data from Swedish industry) add to earlier findings in the literature showing the limitations of the EU ETS to influence investments and innovation. This is a critical and pressing issue for policy makers. With even modest reforms such as the back-loading of allowances meeting strong resistance from some Member States, the future of the EU ETS is rightly put in question. A key question is whether the EU ETS can and should be reformed in a way so that it can have a real impact on investments, or whether other policy instruments should take an increasing role for long-term transformation of the energy system.

Date: 2014
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DOI: 10.1080/14693062.2014.864800

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