Why the EU ETS needs reforming: an empirical analysis of the impact on company investments

Abstract

The European Union's Emissions Trading Scheme (EU ETS) is so far the largest emissions trading system in the world. A rigorous ex post empirical analysis of the scheme is presented. The effect of the scheme on firms' investment decisions in carbonreducing technologies is analysed by using detailed firm-level data from Swedish industry. Based on difference-in-difference estimation as well as a before-after difference estimation, the results reveal that the EU ETS has not had a significant effect on firms' decisions to invest in carbon-mitigating technologies. However, although the EU ETS appears to have no direct effect on investments, it is too early to dismiss the system. Consideration is given to how the EU ETS can realize its potential to become an effective tool in the EU climate and energy policy portfolio. Policy relevanceA thorough analysis and discussion considers the ability of the EU ETS to create strong incentives for investment in carbonreducing measures. The empirical results (using detailed firm-level data from Swedish industry) add to earlier findings in the literature showing the limitations of the EU ETS to influence investments and innovation. This is a critical and pressing issue for policy makers. With even modest reforms such as the back-loading of allowances meeting strong resistance from some Member States, the future of the EU ETS is rightly put in question. A key question is whether the EU ETS can and should be reformed in a way so that it can have a real impact on investments, or whether other policy instruments should take an increasing role for longterm transformation of the energy system.

Effect of the Emissions Trading Scheme on CO2 Abatement in China

“…Laing [10] point out that the effects of EU ETS on low-carbon technology innovation and investment remain uncertain. Lofgren [11] apply the DiD approach and reveal that the EU ETS does not have a significant effect on firms' investment decisions in carbon-reducing technologies.…”

The transformative potential of emissions trading

“…In order to cover also the more specific aspects of our analysis, this was complemented with parameterized snowballing from three additional reference points: innovation (Borghesi et al 2015;Schmidt et al 2012;Kemp and Pontoglio 2011), investments (Jong, Couwenberg, and Woerdman 2014;Löfgren et al 2013;Grubb 2012), institutions (Voß and Simons 2014;Hildén 2014;LaBelle 2012), and integration (Lehmann and Gawel 2013;Schlomann and Eichhammer 2014;Gawel, Strunz, and Lehmann 2014).…”

“…A policy mix may also be necessary to accommodate multivalent policy goals such as nuclear phase out or renewable energy goals as a means of industrial policy (Gawel, Strunz, and Lehmann 2014;WBGU 2011;Löfgren et al 2013). …”

Ex-post Analysis of the EU Emission Trading in Year 2013 in the Czech Republic

“…Focusing on empirical studies, based on official data, questionnaire surveys and interviews, we can find particular studies in the area of the innovation impacts of the EU ETS in Germany (Rogge et al, 2011), the impacts on the investments in Sweden (Lofgren et al, 2014) or empirical ex post analyses of the EU ETS in the EU as a whole (Feng et al, 2012;Lovell et al, 2013;Martin et al, 2014).…”