What is the impact on emissions of trade in emission rights?

The research team wants to examine how EU emissions trading impacts businesses, industrial production and emissions. Are greenhouse gas emissions falling, or are they simply being moved outside Europe? Is emissions trading really driving a transition to green technology?

For a long time no price was put on carbon dioxide emissions from industry, and there was therefore no market incentive for companies to adapt their polluting activities in order to reduce emissions. 

In 2005, in an attempt to rectify this shortcoming, the EU launched the world’s most comprehensive emissions trading scheme for industrial greenhouse gas emissions – the EU Emissions Trading System (EU ETS).

Pricing of carbon dioxide emissions is a key component in the EU’s “Fit for 55” package. Since its launch, EU ETS has undergone major changes, reflected not least in the price of emission rights. In recent years the price for emitting one metric ton of carbon dioxide has risen from approximately €10 to €80. 

The researchers ask how EU ETS is impacting businesses and hence industrial production and emissions. Is EU ETS resulting in a net reduction in greenhouse gas emissions or are emissions merely being moved out of Europe? Or is EU ETS leading to technical development and the use of low-emission technologies? In other words, is production from the EU manufacturing sector at the same level as in 2005 but with a smaller carbon footprint?

To answer these questions they are using Swedish microdata covering the period 1990–2020 as a test environment. 

The researchers can monitor factories and businesses as far back as 15 years before and after the launch of EU ETS. They will be analyzing corporate data on carbon dioxide emissions, production, innovation, dissemination of technology, trade and environmental expenditure. They will be using the panel dimension of the data and estimating difference-in-difference regressions by comparing companies subject to EU ETS with a control group of similar enterprises.

One reason the project has the potential to break new scientific ground is that the researchers are no longer constrained by earlier limited availability of detailed data on carbon dioxide emissions over time from industrial processes, heating and transport.

The researchers hope the results of the project will not only advance research in this field, but will also be of interest to national and European decision makers tasked with designing future instruments to reduce corporate and individual climate impact.

“The impact of the EU Emissions Trading System on firm behavior and CO2 emissions”

Principal investigator:
Professor Per Strömberg

Stockholm School of Economics
Gustav Martinsson

KTH Royal Institute of Technology
Christian Thomann

Stockholm School of Economics

SEK 5.1 million