The Causal Effect of the European Union Emissions Trading Scheme: Evidence from French Manufacturing Plants

Abstract

How do firms respond to regulation and market incentives? Using comprehensive plant- level data for around 9,500 French manufacturing firms, this paper explores the economic and environmental response of plants to the European Union Emissions Trading Scheme (EU ETS) – the EU’s flagship climate policy. Our results suggest that ETS-regulated manufacturing plants in France reduced emissions by an average of 15.7%. The most marked reduction in emissions is observed during Phase II (2008-2013). In terms of economic outcomes, we find a statistically significant reduction in employment (10.4% in Phase II). We aim to understand whether these reductions are real global reductions in emissions or whether they are merely the result of carbon leakage. Leakage may occur because output shifts to unregulated plants, either within the EU or abroad. It may also occur because regulated plants outsource carbon intensive parts of the production process. We make some progress in providing evidence on this by looking at the fuel mix of plants. About half of the reduction in emissions can be accounted for by an increase in the share of gas, which is less carbon intensive than coal and oil. This is both consistent with carbon leakage, because of outsourcing, and real emissions reductions due to a technological change. Ongoing research will shed further light on this in the future. We also examine if there is leakage within firms by looking at firms with both, unregulated and regulated plants. However, we find no evidence in support of this.