2024/05/24 by Jonathan Colmer, Ralf Martin, Mirabelle Muûls +2 · 1 voice · 192 citations
Economics, Econometrics and Finance · Energy · #Business #Carbon fibers #Carbon offset #Climate Change Policy and Economics #Climate change #Computer science #Ecology #Economics #Emissions trading #Energy, Environment, Economic Growth #Energy, Environment, and Transportation Policies #Environmental science #European union #Greenhouse gas #International economics #International trade #Natural resource economics
paper · pdf · doi:10.1093/restud/rdae055
published in The Review of Economic Studies 92(3), 1625-1660 (Oxford University Press)
openalex publication_date 2024/05/24 · openalex created_date 2025/10/10 · openalex updated_date 2026/08/06
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 European Union Emissions Trading System (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.