Conference Agenda

We examine how climate policy uncertainty affects firm-level investment, distinguishing between new and replacement capital. Using newspaper-based measures of climate policy uncertainty and financial data on 8,000 U.S. publicly listed firms, we find that energy-intensive firms respond to heightened uncertainty by reducing new investment while increasing replacement investment. New investment is correlated with lower CO2 emissions and energy use, consistent with new capital embodying greener technologies. To interpret these findings, we develop and calibrate a putty-clay investment model with vintage capital in which new investment entails choosing energy intensity under uncertainty while replacement capital has fixed characteristics. The model confirms that policy uncertainty induces sizable compositional shifts in investment, with new investment substantially more responsive than replacement investment. Our results suggest that climate policy uncertainty can delay the green transition by discouraging the adoption of cleaner capital.

We take stock of the current practices of industrial policies in the EU. We show that industrial policies in the EU on average favour more emission intensive sectors over less emission intensive sectors, and more emission intensive firms over less emission intensive firms. On average, between 2016 and 2019, each additional tonne of carbon was awarded a support premium of 7 EUR. We show that this emissions premium does not derive from grants which are more likely to help firms transition toward cleaner production technologies, but from tax advantages. This premium has the potential to substantially decrease incentives set by carbon pricing. We find that the emissions premium inherent in the EU’s industrial policies is neither explained by heavier lobbying of emission intensive sectors and firms, nor by higher employment, trade exposure, or upstreamness.

Even with carbon pricing in place, investment in low-carbon technologies have remained below socially optimal levels with additional market failures in place. In this work, we develop a two-period partial equilibrium model to evaluate the welfare effects of de-risking policy instruments when learning externalities occur, future carbon prices are uncertain and risk markets are incomplete. Focusing on the risk transfer away from the producer and into the fiscal budget, we account for the regulator’s exposure to carbon price risk and the opportunity cost of earmarked funds associated with long-term, contingent liabilities such as carbon contracts for difference (CCfDs). This framework allows us to characterise optimal risk sharing between the producer and the regulator when fiscal risk is itself socially costly. For this second-best setting, we show analytically that - even in the absence of private hedging markets - a full transfer of carbon price risk into the public budget is generally not optimal. Our numerical results imply that risk-transferring instruments can play an important role in narrowing the welfare gap to first-best, but that excessive public risk absorption may generate large fiscal costs of risk, hence reducing welfare even below a no-policy benchmark.

This paper studies how firms adapt to climate policy. It quantifies the extent to which observed energy-efficiency investment can be attributed to regulation under the EU Emissions Trading Scheme (ETS). I develop a dynamic optimisation model in which firms choose energy-efficiency investment alongside production inputs. The model captures key features of an ETS, including the endogenous determination of firms’ regulatory status. I estimate the model using German firm-level data with detailed measures of energy consumption and energy-efficiency investment. I then conduct a counterfactual analysis by simulating an economy without the ETS. The results show that approximately 9 % of observed energy-efficiency investment during 2011–2018 is attributable to the EU ETS.