Firms’ Response to Climate Regulations-Empirical Investigations Based on the European Emissions Trading System

By Fotios Kalantzis, Salma Khalid, Alexandra Solovyeva, Marcin Wolski

June 28, 2024

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Format: Chicago

Fotios Kalantzis, Salma Khalid, Alexandra Solovyeva, and Marcin Wolski. Firms’ Response to Climate Regulations-Empirical Investigations Based on the European Emissions Trading System, (USA: International Monetary Fund, 2024) accessed December 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

Using a novel cross-country dataset, which merges firm-level financials with information on firms’ participation in the European Unions’ Emissions Trading System (ETS), we investigate how firm performance is affected by tightening of environmental policies that put a price on pollution. We find that more stringent policies do not have a strong negative impact on the profitability of ETS-regulated or non-ETS firms. While firms report an increase in their input costs during periods of high carbon prices, their reported turnover is also higher. Among ETS-regulated firms which must purchase emission certificates under the EU ETS, tightening of climate policies in periods of high carbon prices results in increased investment, particularly in intangible assets. We establish robustness of our results using a quantile regression analysis, ensuring our key findings are not driven by distributional irregularities. Our findings provide support for the benefits of EU ETS on accelerating firms’ climate transition, while keeping firm-level financial costs at bay.

Subject: Climate policy, Emissions trading, Environment, Environmental policy, Greenhouse gas emissions

Keywords: Climate change, Climate finance, Climate policy, Climate transition, Decarbonization, Emissions trading, Emissions Trading System (ETS), Environmental policy, ETS firm, ETS-regulated firm, EU Emissions Trading System, Firm-level analysis, Global, Greenhouse gas emissions, IMF working paper No. 24/135

Publication Details

Pages:

31
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2024/135
Stock No:

WPIEA2024135
ISBN:

9798400279126
ISSN:

1018-5941

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