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.

£6.00
Citation

Muuls, M, R Martin, J Colmer and U Wagner (2022), ‘DP16982 Does Pricing Carbon Mitigate Climate Change? Firm-Level Evidence from the European Union Emissions Trading Scheme‘, CEPR Discussion Paper No. 16982. CEPR Press, Paris & London. https://cepr.org/publications/dp16982