The Impact of the European Carbon Market on Firm Productivity: Evidence from Italian Manufacturing Firms

Filippo Maria D’Arcangelo, Giulia Pavan and Sara Calligaris
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Filippo Maria D’Arcangelo: OECD
Giulia Pavan: Compass Lexecon

No 2022.24, Working Papers from Fondazione Eni Enrico Mattei

Abstract: The European Union Emissions Trading System has raised concerns about possible detrimental effects on firms production through an increase in polluting costs, unless firms change inputs or increase the efficiency in the way they produce. We provide evidence of the causal impact of this policy on firms’ input choices and on total factor productivity on Italian manufacturing firms. Our empirical strategy combines structural estimation of firms’ production function and techniques for policy evaluation. Moreover, we argue that a commonly used strategy in this literature, consisting in using propensity score matching on the productivity obtained from estimating the production function, does not provide valid inference. We rely instead on an innovative structural approach. We find that the policy has a small negative effect on productivity that is heterogeneous across industries. We show that these findings are consistent with firms switching fuels in production, rather than undergoing a substantial process change.

Keywords: Emission trading; EU ETS; Environmental Policy; Manufacturing; Productivity; Production Function (search for similar items in EconPapers)
JEL-codes: L23 L26 Q58 (search for similar items in EconPapers)
Date: 2022-09
New Economics Papers: this item is included in nep-eff, nep-ene, nep-env, nep-eur and nep-sbm
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Persistent link: https://EconPapers.repec.org/RePEc:fem:femwpa:2022.24

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