Conference Agenda

Carbon leakage can weaken the effectiveness of carbon pricing by encouraging firms to move activities to countries with less strict regulations. This paper examines a less visible margin of carbon leakage: how multinational enterprises reallocate resources within their own organisations. This paper analyses whether multinational enterprises shifted assets and employees away from subsidiaries regulated by the European Union Emissions Trading System (EU ETS) after the system became stricter in 2018. Using data linking EU ETS compliance with subsidiary-level financial accounts, the analysis employs both matched comparisons and within-group share analysis. The results show no immediate drop in assets or employment at regulated subsidiaries after 2018. However, within multinational groups, regulated subsidiaries held a smaller share of assets and employment compared to unregulated sister subsidiaries following the policy change. These findings suggest that, under a tighter EU ETS, adjustment occurred gradually through internal reallocation of resources, rather than immediate downsizing of regulated subsidiaries. This study adds to the literature by highlighting internal resource allocation as a subtle form of carbon leakage, helping to explain mixed evidence across different data sources, adjustment margins, and EU ETS phases.