Institutional and capability enablers of firm-level emissions abatement under the EU Emissions Trading System

This paper investigates why firms facing identical carbon-pricing incentives exhibit heterogeneous decarbonization trajectories. We address this question through a theoretical framework that conceptualizes national institutional quality and innovation-system capabilities as boundary conditions that shape firms’ adjustment capacity under emissions trading. Our analysis combines firm-level verified emissions from the EU Emissions Trading System (EU ETS) for 31 European countries over the period 2005-2018 with country-level indicators from the IMD World Competitiveness Center and the World Economic Forum. We provide evidence that firms operating in environments characterized by stronger human capital capabilities, more advanced technological and digital infrastructure, and more supportive legal and scientific frameworks achieve greater emissions abatement. These effects are strongest during Phase III of the EU ETS, when the carbon-pricing constraint became more binding. Overall, our findings highlight how institutional and capability conditions mediate firms’ responses to a harmonized carbon price, offering new insights into the sources of heterogeneous abatement outcomes under a unified emissions trading system. From a policy perspective, our paper contributes to debates on the country level boundary conditions under which emissions trading can support more transformative decarbonization trajectories across heterogeneous national contexts.