Uneven Burdens: Heterogeneity in Compliance Costs under the EU ETS

This paper proposes a simple empirical framework to measure installationlevel compliance costs under the EU Emissions Trading System (EU ETS). Using installation-level emissions data and institutional features of allowance allocation, we derive a tractable measure of compliance costs. Applying the method to Phase III of the EU ETS (2013–2020), we document that, on average, compliance costs amount to about €1.4 per ton of output, or equivalently about €5.4 per ton of CO2. Beyond this average magnitude, we also find substantial heterogeneity in compliance costs across installations. A Shapley decomposition of the variance shows that most of the total variation arises from firm-level differences rather than sector or country effects. Linking installations to firm-level balance sheet data reveals that firm age is a key determinant of compliance costs, consistent with technological lock-in and capital-vintage effects, although the underlying relationship may be nonlinear and possibly non-monotonic. We further provide a back-of-the-envelope calculation of the gains from permit trading, showing that access to the permit market generates economically meaningful cost savings at the installation level, averaging about €74,400 per installation per year. These findings highlight the efficiency advantages of emissions trading systems.