From Free to Fee: How Emission Permit Allocation Affects Firms

Marie Alder (), Eva Franzmeyer () and Benjamin Hattemer ()
Additional contact information
Marie Alder: European University Institute
Eva Franzmeyer: European University Institute
Benjamin Hattemer: University of Helsinki & FIT

No 42, Working Papers from Finnish Centre of Excellence in Tax Systems Research

Abstract: This study provides new causal evidence on the firm-level effects of reducing free emission permits in emission trading systems. Using a difference-in-differences design, we exploit a reform that altered an eligibility threshold for free permit allocation. Receiving fewer free permits reduced emissions by more than 14 percent relative to firms that retained them. This reduction was accompanied by similar declines in revenue, employment, and assets. We develop a multi-product general equilibrium model that explains these patterns through a novel mechanism linking permit allocation to firms’ decisions. Firms that receive fewer free emission permits terminate their least productive product lines, increasing the market share of the remaining ones. Higher expected profits then encourage earlier adoption of an efficiency-improving technology.

Keywords: Emissions; Emission permits; Emission trading (search for similar items in EconPapers)
Pages: 74
Date: 2026-01
References: Add references at CitEc
Citations:

Published in FIT Working Paper Series, Finnish Center of Excellence in Tax Systems Research

Downloads: (external link)
https://verotutkimus.fi/verotutkimus/wp-content/up ... meyer-Hattemer-1.pdf First version, 2026 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fit:wpaper:42

Access Statistics for this paper

More papers in Working Papers from Finnish Centre of Excellence in Tax Systems Research Contact information at EDIRC.
Bibliographic data for series maintained by Marjukka Hourunranta ().