When to go Green? Firm Dynamics & Clean Technology Adoption

Carbon pricing is a central policy instrument for reducing emissions, but governments face a trade-off: faster decarbonization can raise output losses and carbon leakage, while gradual implementa-tion slows emission reductions. This paper studies how EU carbon policies have shaped firms’ adoption of abatement technologies and identifies the optimal trajectory to reach the EU’s 2050 net zero target, particularly in a unilateral context. I develop a dynamic heterogeneous-firm model in which forward-looking manufacturing firms choose when to adopt discrete abatement technologies under a gradually tightening carbon price. I estimate it using panel data on EU ETS firms from 2005-2019. The model rationalizes the low carbon prices of the 2010s as a consequence of gradual policy and firm anticipation. Emission reduc-tions arise mainly from large, productive, and initially polluting firms. Anticipation of future tightening mitigates half of the short-run output losses in 2025 and two-thirds by 2050, keeping overall output losses below 2%. A moderately faster tightening could cut cumulative emissions by 15% at an additional cost of only 0.11% of output. Finally, because firms anticipate future policy changes, unilateral and global carbon pricing yield nearly identical effects on domestic output and carbon leakage.