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Pricing Carbon Emissions Does Not Result In Economic Losses, EU Study Finds

A EU study examining the EU Emissions Trading System (ETS) policy found that pricing carbon emissions does not have a negative economic impact for those manufacturing firms regulated under the policy.

A study by Imperial College Business School, in collaboration with the University of Virginia and University of Mannheim, examined whether the ETS, which came into force in 2005, has resulted in a decline in economic activity for those manufacturers that have been regulated under the policy.

The ETS is a ‘cap and trade’ policy that establishes a price for the right to emit CO2. This is achieved by imposing a cap on the total emissions from more than 12,000 power and manufacturing plants in 31 countries across Europe. The cap covers 40% of the EU’s emissions.

The researchers found the manufacturing firms regulated through the ETS have remained financially healthy and competitive, and that a reduction in these firms’ emissions had no negative effect on their profitability.

In particular, the study found that the policy actually resulted in French manufacturers cutting emissions by 43 million tonnes between 2005 and 2012.

Under the cap of the ETS, companies can receive or buy emission allowances, which they can trade with one another.

This creates a market for emissions where companies that can reduce emissions more cheaply can sell excess allowances to those facing higher abatement costs.

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The study found that the manufacturing firms regulated under the ETS system reduced carbon emissions by an estimated 15% more than unregulated firms.

Dr Mirabelle Muûls, associate professor of economics at Imperial College Business School and one of the authors of the study, said: “Greenhouse gases are one of the starkest examples of market failure in the world, and vital regulation is needed to reduce them. Our research clearly shows that the ETS is an effective way to address climate change without putting firms out of business.”

Using financial data on the firms in the dataset, such as balance sheet data, turnover, imports and total labour costs, the researchers found that the ETS system had no negative impact on companies’ economic activity.

It also found no evidence of outsourcing production abroad to non-regulated firms or markets. Instead, firms made targeted investments, reducing the emissions intensity of production, and continued to be productive and profitable.

It is often through that carbon pricing would increase manufacturing costs and result in reduced economic activity. However, the results from the study actually found that French companies invested in energy-saving production technologies, which lowered energy bills and helped them to offset compliance costs such as buying emissions permits or undertaking costly emissions abatement.

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Muûls said: “These findings show how market-based regulatory policies to tackle the climate crisis can achieve their objective.

“With the ETS now being extended to more sectors in Europe, and the introduction of the Carbon Border Adjustment Mechanism, we are urging policymakers around the world to consider introducing and expanding carbon pricing to tackle climate change.”

New EU study - pricing carbon emissions does not result in economic losses for regulated firms - Credit: iStock

Source: E&T

 

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