The EU ETS and corporate environmental abatement

ABSTRACT

This article studies the relationship between firm-level emissions-to-cap ratio (ETC) and environmental abatement, by using a unique and extensive data set of 10 762 installations covered by the European Union Emission Trading Scheme (EU ETS) matched to 5931 firms. We find that a shortage of emissions allowances is related to more abatement in later years while a surplus of emissions allowances results in worse subsequent environmental performance. This finding underscores the importance of reducing the global amount of allowances in the ETS system. Our results also suggest that stakeholder pressure and the creation of transparency concerning corporate environmental performance are likely to support the effectiveness of the system.

KEYWORDS:

• Cap-and-trade
• carbon emissions
• emission abatement
• stakeholder pressure
• EU ETS

JEL CLASSIFICATIONS:

• G38
• Q58

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ A time lag of 1 or 3 years generates similar results. We also used Δ (emissions/sales) as dependent variable; this did not change our results; next we used Δ% emissions as dependent variable while controlling for Δ% sales; this did not affect our findings either.

² We do not use fixed firm effects as the dummy listed is time invariant. Nevertheless, the use of firm fixed effects provides similar results.

³ Carbon Market Data is a carbon market research company and data vendor. The Carbon Market Data database is based on information published by the CITL and contains all the information on verified and allocated emissions of all installations in the ETS. All emission data were aggregated at (matched) firm-level.

⁴ The account holder is the entity that manages the installation. Our matching procedure is similar to Calel and Dechezleprêtre (2015).