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Mitigation versus Competitiveness? Industry Compensation in the European Union Emissions Trading System

Author

Listed:
  • Till Köveker
  • Robin Sogalla

Abstract

Carbon pricing policies are usually combined with compensation for exposed firms to prevent adverse competitiveness effects. In cap-and-trade systems, this carbon cost compen sation mostly occurs through free allocation of emission permits. Using an administrative panel of German manufacturing firms, this paper investigates how free allocation in the European Union Emissions Trading System affects firms’ emission reductions and competi tiveness. Leveraging a reform of free allocation rules in a continuous difference-in-differences design, we find that a reduction of freely allocated emission permits decreased firms’ emis sions and emission intensity. For firms deemed to be at risk of carbon leakage, our results suggest that this decrease is driven by energy efficiency improvements instead of outsourcing of emission-intensive production. On the other hand, we do not find statistically significant effects on firms’ employment, sales, value added, capital and exports-indicating that the reduction in free permits did not negatively affect firms’ competitiveness.

Suggested Citation

  • Till Köveker & Robin Sogalla, 2026. "Mitigation versus Competitiveness? Industry Compensation in the European Union Emissions Trading System," CRC TR 224 Discussion Paper Series crctr224_2025_756, University of Bonn and University of Mannheim, Germany.
    • Handle: RePEc:bon:boncrc:crctr224_2025_756
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    References listed on IDEAS

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    JEL classification:

    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • F18 - International Economics - - Trade - - - Trade and Environment

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