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Does Pricing Carbon Mitigate Climate Change? Firm-Level Evidence from the European Union Emissions Trading System

Author

Listed:
  • Jonathan Colmer
  • Ralf Martin
  • Mirabelle Muûls
  • Ulrich J Wagner

Abstract

In theory, market-based regulatory instruments correct market failures at least cost. However, evidence on their efficacy remains scarce. Using administrative data, we estimate that, on average, the European Union Emissions Trading System (EU ETS)—the world’s first and largest market-based climate policy—induced regulated manufacturing firms to reduce carbon dioxide emissions by 14–16% with no detectable contractions in economic activity. We find no evidence of outsourcing to unregulated firms or markets; instead, firms made targeted investments, reducing the emissions intensity of production. These results indicate that the EU ETS induced global emissions reductions, a necessary and sufficient condition for mitigating climate change. We show that the absence of any negative economic effects can be rationalized in a model where pricing the externality induces firms to make fixed-cost investments in energy-saving capital that reduce marginal variable costs.

Suggested Citation

  • Jonathan Colmer & Ralf Martin & Mirabelle Muûls & Ulrich J Wagner, 2025. "Does Pricing Carbon Mitigate Climate Change? Firm-Level Evidence from the European Union Emissions Trading System," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 92(3), pages 1625-1660.
    • Handle: RePEc:oup:restud:v:92:y:2025:i:3:p:1625-1660.
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    File URL: http://hdl.handle.net/10.1093/restud/rdae055
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    Cited by:

    1. Ertian Chen & Lichao Chen & Lars Nesheim, 2026. "Carbon Regulation and Competition in the European Airline Industry," Papers 2603.27724, arXiv.org.
    2. Jaime Arellano-Bover & Carolina Bussotti & Matteo Paradisi & Liangjie Wu, 2026. "The Labor Demand Implications of Brand Capital: Evidence from Trademark Transactions," RFBerlin Discussion Paper Series 26079, ROCKWOOL Foundation Berlin (RFBerlin).
    3. Bijnens, Gert & Hutchinson, John & Saint Guilhem, Arthur, 2026. "Navigating the carbon price shock: Electricity costs and employment reallocation in Europe," Utilities Policy, Elsevier, vol. 99(C).
    4. Henrekson, Magnus & Sandström, Christian & Stenkula, Mikael, 2026. "Green deals in the EU: Lessons for the United Kingdom," IEA Discussion Papers 148, Institute of Economic Affairs (IEA).
    5. Broadstock, David C. & Fouquet, Roger & Kim, Jeong Won, 2025. "Carbon pricing and stock performance: are carbon prices already more influential than energy prices?," LSE Research Online Documents on Economics 128928, London School of Economics and Political Science, LSE Library.
    6. Hao, Tian & Zhou, Lizhuo & Hu, Peng & Zhao, Tongpu & Wang, Peiqiong, 2025. "From hedge to risk: Nonlinear effects of climate policy uncertainty on corporate biodiversity exposure," Energy Economics, Elsevier, vol. 151(C).
    7. Zhonglin Sheng & Longyan Zhang & Xiaoling Wang & Xiao-Chen Yuan & Chao Feng, 2026. "Policy effects of belt and road initiative on corporate green transformation: empirical tests based on dual machine learning model," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 28(2), pages 5207-5232, February.
    8. Adbi, Arzi & Agarwal, Sumit & Natarajan, Siddharth, 2025. "Global heterogeneity in ETS rollouts and subsequent decarbonization outcomes," Energy Economics, Elsevier, vol. 151(C).
    9. Green, Daniel & Vallee, Boris, 2025. "Measurement and effects of bank exit policies," Journal of Financial Economics, Elsevier, vol. 172(C).
    10. Hille, Erik & Angerpointner, Cian, 2025. "The effect of energy prices on employment: Evidence from a developing country," Journal of Environmental Economics and Management, Elsevier, vol. 134(C).
    11. Ning Yan & Shenhai Huang & Yan Chen & Daini Zhang & Qin Xu & Xiangyi Yang & Shiyan Wen, 2025. "The Impact of Carbon Trading Market on the Layout Decision of Renewable Energy Investment—Theoretical Modeling and Case Study," Energies, MDPI, vol. 18(15), pages 1-30, July.
    12. Broadstock, David C. & Fouquet, Roger & Kim, Jeong Won, 2025. "Carbon pricing and stock performance: Are carbon prices already more influential than energy prices?," Energy Policy, Elsevier, vol. 206(C).
    13. Eslahi, Ethan & Creti, Anna & Sanin, María-Eugenia, 2026. "Mission accomplished? A post-assessment of EU ETS impact on power sector emissions reduction," Ecological Economics, Elsevier, vol. 239(C).
    14. Nam, Hyun-Jung & Ryu, Doojin & Szilagyi, Peter G., 2025. "Technological progress and carbon emissions: Evidence from the European Union," Global Finance Journal, Elsevier, vol. 67(C).
    15. Ma, Yunning & Huang, Xuhui & Lee, Hyoungsuk & Choi, Yongrok & Tsai, Fu-Sheng, 2026. "Can the financial scheme of emission trading affect technology development and sustainability?," Research in International Business and Finance, Elsevier, vol. 81(C).
    16. Ertian Chen & Lichao Chen & Lars Nesheim, 2026. "Carbon regulation and competition in the European airline industry," CeMMAP working papers 04/26, Institute for Fiscal Studies.
    17. Chien-Chiang Lee & Godwin Olasehinde-Williams, 2026. "The impact of the emissions trading system on foreign carbon embedded in domestic final demand: evidence from the Eurozone," Economic Change and Restructuring, Springer, vol. 59(2), pages 1-31, April.
    18. Fourné, Marius, 2025. "Cross-border transmission of climate policies through global production networks," IWH Discussion Papers 19/2025, Halle Institute for Economic Research (IWH).

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