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.

This paper analyzes the impact of environmental policy on firms' product choice and the energy intensity of firms' product ranges using the EU Emissions Trading Scheme (EU ETS) as an example. We derive testable predictions on the likely impact of the ETS and employ a matched difference-in-differences approach to empirically test the predictions for manufacturing firms in Germany between 2003 and 2018. Our results show that the ETS caused an increase in the number of firms dropping products, specifically energy-intensive product categories, a reduction in the number of products they supply, and a decrease in emission intensity during the early years of the ETS. In a separate analysis, we find that the product mix played a minor role in this overall reduction. We find no evidence of negative impacts on firm performance; instead, profits increase. The mineral products sector behaved most consistently with our theoretical predictions, increasing TFP and dropping product categories, likely due to higher policy pressure.

This study provides causal firm-level estimates of the effect of a reduction in free emission allowances in emission trading systems on emissions and economic performance. We study an EU ETS reform that withdrew the right of some manufacturing firms to receive most emission allowances for free, exploiting this change in a difference-in-differences setting. We find that paying for allowances decreased emissions by more than 11 percent overall, relative to firms that retained free allowances. This reduction was accompanied by a significant decrease in economic performance, including revenue, employment, and assets of a similar magnitude. Using a multi-product model, we show that our results can be rationalized through an extensive margin adjustment of firms.

We investigate the abatement effects of the first nationwide carbon market in East Asia. Exploiting the flexible entry and exit rules of the Korea Emissions Trading Scheme (KETS), we find that the KETS achieves limited emission reductions. These reductions are driven primarily by small entities and those near the inclusion thresholds, while large entities do not significantly reduce emissions. Consistent with this, we document pronounced bunching just below the 25,000-ton threshold, indicating that the flexible entry-exit design induces strategic abatement behavior. Notably, we find little evidence of carbon leakage to unregulated affiliates, suggesting that the observed reductions represent genuine abatement rather than emission relocation. However, these reductions rely mainly on output contraction and reduced factor inputs rather than clean technology investment or efficiency improvements, crowding out R&D investment and negatively affecting productivity.