Mitigation versus Competitiveness? Industry Compensation in the European Union Emissions Trading System

Till Köveker and Robin Sogalla

CRC TR 224 Discussion Paper Series from University of Bonn and University of Mannheim, Germany

Abstract: Carbon pricing policies are usually combined with compensation for exposed firms to prevent adverse competitiveness effects. In cap-and-trade systems, this carbon cost compen sation mostly occurs through free allocation of emission permits. Using an administrative panel of German manufacturing firms, this paper investigates how free allocation in the European Union Emissions Trading System affects firms’ emission reductions and competi tiveness. Leveraging a reform of free allocation rules in a continuous difference-in-differences design, we find that a reduction of freely allocated emission permits decreased firms’ emis sions and emission intensity. For firms deemed to be at risk of carbon leakage, our results suggest that this decrease is driven by energy efficiency improvements instead of outsourcing of emission-intensive production. On the other hand, we do not find statistically significant effects on firms’ employment, sales, value added, capital and exports-indicating that the reduction in free permits did not negatively affect firms’ competitiveness.

Keywords: Cap and Trade; Permit Allocation; Industry Compensation; Greenhouse Gas Emissions; Competitiveness; Manufacturing Firms (search for similar items in EconPapers)
JEL-codes: D22 F18 H23 Q54 Q58 (search for similar items in EconPapers)
Pages: 36
Date: 2026-06
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