Does pricing carbon mitigate climate change? Firm-level evidence from the European Union emissions trading system
File(s)
Published version
Author(s)
Colmer, Jonathan
Martin, Ralf
Muuls, Mirabelle
Wagner, Ulrich
Type
Journal Article
Abstract
In theory, market-based regulatory instruments correct market failures at least cost. However, evidence on their efficacy remains scarce. Using administrative data, we estimate that, on
average, the EU ETS – the world’s first and largest market-based climate policy – induced regulated manufacturing firms to reduce carbon dioxide emissions by 14-16% with no detectable
contractions in economic activity. We find no evidence of outsourcing to unregulated firms or
markets; instead firms made targeted investments, reducing the emissions intensity of production. These results indicate that the EU ETS induced global emissions reductions, a necessary
and sufficient condition for mitigating climate change. We show that the absence of any negative economic effects can be rationalized in a model where pricing the externality induces firms
to make fixed-cost investments in energy-saving capital that reduce marginal variable costs.
average, the EU ETS – the world’s first and largest market-based climate policy – induced regulated manufacturing firms to reduce carbon dioxide emissions by 14-16% with no detectable
contractions in economic activity. We find no evidence of outsourcing to unregulated firms or
markets; instead firms made targeted investments, reducing the emissions intensity of production. These results indicate that the EU ETS induced global emissions reductions, a necessary
and sufficient condition for mitigating climate change. We show that the absence of any negative economic effects can be rationalized in a model where pricing the externality induces firms
to make fixed-cost investments in energy-saving capital that reduce marginal variable costs.
Date Issued
2025-05-01
Date Acceptance
2024-01-21
Citation
The Review of Economic Studies, 2025, 92 (3), pp.1625-1660
ISSN
0034-6527
Publisher
Oxford University Press
Start Page
1625
End Page
1660
Journal / Book Title
The Review of Economic Studies
Volume
92
Issue
3
Copyright Statement
© The Author(s) 2024. Published by Oxford University Press on behalf of The Review of Economic Studies Limited.
This is an Open Access article distributed under the terms of the Creative Commons Attribution License (https://creativecommons.org/licenses/by/4.0/), which permits unrestricted reuse, distribution, and reproduction in any medium, provided the original work is properly cited.
This is an Open Access article distributed under the terms of the Creative Commons Attribution License (https://creativecommons.org/licenses/by/4.0/), which permits unrestricted reuse, distribution, and reproduction in any medium, provided the original work is properly cited.
License URL
Identifier
https://academic.oup.com/restud/advance-article/doi/10.1093/restud/rdae055/7681739
Subjects
Cap-and-trade
Carbon leakage
Investment
Climate policy Q54
Q58
H23
L50
F18
Publication Status
Published
Article Number
rdae055
Date Publish Online
2024-05-24