Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/325309 
Year of Publication: 
2025
Series/Report no.: 
DIW Discussion Papers No. 2133
Publisher: 
Deutsches Institut für Wirtschaftsforschung (DIW), Berlin
Abstract: 
Carbon pricing policies are usually combined with compensation for exposed firms to prevent adverse competitiveness effects. In cap-and-trade systems, this carbon cost compensation mostly occurs through free allocation of emission permits. Using an administrative panel of German manufacturing firms, this paper investigates how free allocation in the European Union Emissions Trading System affects firms' competitiveness and their incentives to reduce emissions. Leveraging a reform of free allocation rules in a continuous difference-in-differences design, we find that that a reduction of freely allocated emission permits decreased firms' emission intensity. Our results suggest that this decrease is driven by energy efficiency improvements instead of outsourcing of emission intensive production. On the other hand, we do not find statistically significant effects on firms' employment, sales, value added, investments and exports - indicating that the reduction in free permits did not reduce firms' competitiveness.
Subjects: 
Cap and Trade
Permit Allocation
Industry Compensation
Greenhouse Gas Emissions
Competitiveness
Manufacturing Firms
JEL: 
Q54
Q58
H23
D22
F18
Document Type: 
Working Paper

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