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Catching up and falling behind: Cross-country evidence on the impact of the EU ETS on firm productivity

Michael Themann and Nikolas Koch

No 904, Ruhr Economic Papers from RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen

Abstract: This paper assesses the potential impact of the European Union Emissions Trading System (EU ETS) on firm productivity. We estimate a stylized version of the neo-Schumpeterian model, which incorporates innovation and productivity catch-up as two potential sources of firm's productivity growth, while at the same time accounting for persistent productivity dispersion within industries. This dynamic model allows us to differentiate the potential effects of the EU ETS on total factor productivity (TFP) depending on the level of firms' technological advancement. The identification approach is based on a difference-in-difference approach exploiting the incomplete participation requirements of the EU ETS and the rich panel structure of firm-level data for eight EU countries from 2002 to 2012. We find evidence that the policy effects on TFP are highly heterogeneous and depend on the distance to the technological frontier, measured as the highest TFP in each year-industry. Productivity effects are positive for firms that are close to the frontier, but they turn negative for firms operating far behind the frontier.

Keywords: Environmental regulation; EU ETS; productivity; competitiveness (search for similar items in EconPapers)
JEL-codes: D22 Q54 Q58 (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-bec, nep-eff, nep-ene, nep-env, nep-reg and nep-tid
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