Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/267492 
Year of Publication: 
2022
Series/Report no.: 
Working Paper No. 027.2022
Publisher: 
Fondazione Eni Enrico Mattei (FEEM), Milano
Abstract: 
This paper empirically investigates the effect of the European Emission Trading Scheme (EU ETS) on cross-country investments. To avoid carbon leakage, the scheme allocates a number of free allowances to firms at risk of relocating investments in areas outside the EU ETS. To study this problem, we employ a model of the firm's investment decision in conjunction with novel firm-level data. In contrast with most previous literature, we stress the importance of firms' heterogeneity in the analysis and leverage it. We derive conditions for the firm's optimal emissions to construct a measure of investment sensitivity to carbon pricing from observed pollution data. This allows to identify the effect of the EU ETS on international investments by comparing the expected profits from investing in several different countries. We find that investments react to carbon pricing and that the effect is stronger for more polluting investments. However, the aggregate amount of diverted investments is small. We moreover show that the lost investments do not justify, alone, the generous compensations scheme aimed at retaining investments.
Subjects: 
Emission trading
carbon leakage
investment location
EU ETS
JEL: 
D22
F18
Q52
Q54
Document Type: 
Working Paper

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.