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Firms’ response to climate regulations: Empirical investigations based on the European Emissions Trading System

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  • Kalantzis, Fotios
  • Khalid, Salma
  • Solovyeva, Alexandra
  • Wolski, Marcin

Abstract

Using a novel cross-country dataset, which merges firm-level financials with information on firms' participation in the European Union Emissions Trading System (EU ETS), we investigate how firm performance is affected by tightening of environmental policies that put a price on pollution. We find that more stringent policies do not have a strong negative impact on the profitability of ETS-regulated or non-ETS firms. While firms report an increase in their input costs during periods of high carbon prices, their reported turnover is also higher. Among ETS-regulated firms which must purchase emission certificates under the EU ETS, tightening of climate policies in periods of high carbon prices results in increased investment, particularly in intangible assets. We establish robustness of our results using a quantile regression analysis, ensuring our key findings are not driven by distributional irregularities. Our findings provide support for the benefits of EU ETS on accelerating firms’ climate transition, while keeping firm-level financial costs at bay.

Suggested Citation

  • Kalantzis, Fotios & Khalid, Salma & Solovyeva, Alexandra & Wolski, Marcin, 2025. "Firms’ response to climate regulations: Empirical investigations based on the European Emissions Trading System," Energy Policy, Elsevier, vol. 206(C).
    • Handle: RePEc:eee:enepol:v:206:y:2025:i:c:s0301421525001193
    DOI: 10.1016/j.enpol.2025.114612
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    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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