Discussion paper
DP16982 Does Pricing Carbon Mitigate Climate Change? Firm-Level Evidence from the European Union Emissions Trading Scheme
In theory, market-based regulatory instruments correct market failures at least cost. However, evidence on their efficacy remains scarce. Using administrative data, we estimate that the EU ETS – the world’s first and largest market-based climate policy – induced regulated firms to reduce carbon dioxide emissions by 8-12% compared to unregulated firms, a necessary condition for climate change mitigation. We find no evidence of outsourcing to unregulated firms or markets; instead firms made targeted investments, reducing the emissions intensity of production. These findings suggest that the EU ETS induced global emissions reductions, a necessary and sufficient condition for
mitigating climate change.
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