The carbon emissions of French manufacturers fell by an estimated 15% during the first eight years of the EU Emissions Trading System policy.
This is the key finding of a new study by experts at Imperial College Business School, in collaboration with the University of Virginia and University of Mannheim.
The EU Emissions Trading System is a “cap and trade” policy that aims to lower greenhouse gas emissions within European Union countries. It establishes a price for the right to emit carbon dioxide (CO2), imposing a cap on the total emissions from more than 12,000 power and manufacturing plants in 31 countries across Europe, covering 40 percent of the EU’s emissions.
The researchers found that manufacturing firms who were regulated through the ETS have remained financially healthy and competitive and that a reduction in these firms’ emissions had no negative effect on their profitability. The study found that because of the policy, French manufacturers cut emissions by 43 million tonnes between 2005 and 2012.
“Our research clearly shows that the EU Emissions Trading System is an effective way to address climate change without putting firms out of business.” Dr Mirabelle Muûls Associate Professor of Economics, Imperial College Business School
Using data on the carbon emissions emitted by more than 4,000 French manufacturing firms, the researchers mapped emissions from 1996 through to the launch of the ETS in 2005 and in the years up to 2012.
Under the cap of the ETS, companies can receive or buy emission allowances which they can trade with one another. This creates a market for emissions where companies that can reduce emissions more cheaply can sell excess allowances to those facing higher abatement costs.
The researchers found that manufacturing firms who were regulated under the ETS system, dropped their carbon emissions by an estimated 15% more than unregulated firms.
Dr Mirabelle Muûls, Associate Professor of Economics at Imperial College Business School and one of the authors of the study said: “Greenhouse gases are one of the starkest examples of market failure in the world, and vital regulation is needed to reduce them. Our research clearly shows that the EU Emissions Trading System is an effective way to address climate change without putting firms out of business.”
Energy saving and productivity
Using financial data on the firms in the dataset, such as balance sheet data, turnover, imports and total labour costs, the researchers found that the ETS system had no negative impact on companies’ economic activity. In the early years of the policy, regulated firms continued to be productive and profitable, and did not shift their production abroad to non-regulated regions. There are no signs in the data of carbon leakage.
Carbon pricing could increase manufacturing costs and result in reduced economic activity. Yet, the researchers found that French companies invested in energy-saving production technologies, which lowered energy bills and helped them to offset compliance costs such as buying emissions permits or undertaking costly emissions abatement.
Dr Muuls said: “These findings show how market-based regulatory policies to tackle the climate crisis can achieve their objective. With the EU ETS now being extended to more sectors in Europe, and the introduction of the Carbon Border Adjustment Mechanism, we are urging policymakers around the world to consider introducing and expanding carbon pricing to tackle climate change.”
The paper, Does pricing carbon mitigate climate change? Firm-level evidence from the European Union Emissions Trading System, was co-authored by Dr Mirabelle Muûls and Dr Ralf Martin from Imperial College Business School, alongside Dr Jonathan Colmer from the University of Virginia and Professor Ulrich Wagner of the University of Mannheim. The paper is published in the Review of Economic Studies.
Main image credit: Shutterstock.