Firms’ Response to Climate Regulations-Empirical Investigations Based on the European Emissions Trading System

Fotios Kalantzis, Salma Khalid, Alexandra Solovyeva and Marcin Wolski

No 2024/135, IMF Working Papers from International Monetary Fund

Abstract: Using a novel cross-country dataset, which merges firm-level financials with information on firms’ participation in the European Unions’ Emissions Trading System (ETS), we investigate how firm performance is affected by tightening of environmental policies that put a price on pollution. We find that more stringent policies do not have a strong negative impact on the profitability of ETS-regulated or non-ETS firms. While firms report an increase in their input costs during periods of high carbon prices, their reported turnover is also higher. Among ETS-regulated firms which must purchase emission certificates under the EU ETS, tightening of climate policies in periods of high carbon prices results in increased investment, particularly in intangible assets. We establish robustness of our results using a quantile regression analysis, ensuring our key findings are not driven by distributional irregularities. Our findings provide support for the benefits of EU ETS on accelerating firms’ climate transition, while keeping firm-level financial costs at bay.

Keywords: climate finance; climate change; decarbonization; firm-level analysis; Emissions Trading System (ETS); ETS firm; climate transition; EU Emissions Trading System; ETS-regulated firm; IMF working paper No. 24/135; Emissions trading; Climate policy; Environmental policy; Greenhouse gas emissions; Global (search for similar items in EconPapers)
Pages: 31
Date: 2024-06-28
New Economics Papers: this item is included in nep-cfn, nep-eec, nep-ene, nep-env, nep-reg and nep-sbm
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