The EU ETS Stimulated Innovation Without Productivity Losses

TThe EU ETS is the main climate policy instrument in the European Union. By putting a price on carbon emissions, it aims to reduce GHG emissions while encouraging firms to adopt cleaner technologies. This policy brief summarizes the results from the recent paper examining the effects of the EU ETS on productivity, innovation activity, and environmental performance among Finnish energy-intensive firms. The analysis is based on various firm-level datasets covering the period 2000–2020. The data include financial statements, emissions, energy use, innovation activity, and R&D expenditure. Causal effects are identified by exploiting the staggered difference-in-difference method. The results show that the EU ETS did not reduce firms’ productivity or R&D expenditure. At the same time, regulated firms became significantly more likely to introduce both process and product innovations. In addition, energy intensity declined by approximately ten percent following regulation. These findings suggest that carbon pricing can stimulate technological adaptation and innovation without generating measurable costs on firm competitiveness. The innovation effects appear to arise primarily through technology adoption and process improvements rather than increased R&D inputs. Overall, the results support the use of climate policies as an effective tool for promoting the green transition while maintaining economic performance.