Assessing the impact of the EU ETS using firm level data Jan Abrell, Anta Ndoye Faye, Georg Zachmann
The EU Emission trading scheme (EU ETS) Incentivise the most economic mitigation efforts by Capping carbon emissions Making carbon permits a tradable good 6 years of experience with ETS imply an empirical assessment of Its effectiveness (did it deliver reductions) Its impact on the company s performance (added value, profit margin, employment)
Literature Effectiveness: Ellerman and Buchner (2006), Grubb and al. (2009), Ellerman and al. (2010) Results: main reduction of emission took place between 2004-2005 Drawback: Short period analysis (2 or 3 years), lack of counterfactual Competitiveness: Demailly and Quirion (2008), Anger and Oberndorfer (2008) Results: modest competiveness losses in the first phase Drawback: Static analysis, sector specific or country specific, lack of counterfactual
The two phases of the EU ETS 2005-2007: trial phase (first phase) Grandfathering of allowances No banking 2008-2012: second phase Mainly Grandfathering of allowances Banking emissions in the regulated sectors increased by 2 % due to a high cap and the import of offsets Tighter cap, the amount of allowances distributed was reduced from 2007 to 2008 by about 11 percent 35 30 Daily Closing Price EUA spot 25 20 15 10 5 0 01.07.2005 01.01.2006 01.07.2006 01.01.2007 01.07.2007 01.01.2008 01.07.2008 01.01.2009 01.07.2009 01.01.2010 01.07.2010
ETS emissions by country Phase I Phase II Crisis year
ETS emissions by sector
Data CITL emission data Allocated emissions 2005-2008 Verified emissions 2005-2008 Allocation factor: the quotient of free allocation of emissions allocated to the verified emissions AMADEUS Profit Margin, Employment, Turnover, Added Value, Fixed Capital Both sets matched via adresses For 13000 CITL installations we got 2101 AMADEUS companies(3696 installations), representing 59% of the emissions Company level data allows us to: Control emission reductions for company performance Analyse whether being included in the ETS had an effect on company performance
Meadian allocation factor 1,16 1,14 1,12 1,1 1,08 1,06 Germany 1,04 2005 2006 2007 2008 Amadeus companies CITL Median allocation factor 1,3 1,25 1,2 1,15 1,1 Poland 1,05 2005 2006 2007 2008 Amadeus companies CITL Not a perfect match but reasonable!
Effectiveness of the EU ETS Our goal is to analyse whether companies changed their emission reduction strategy from 2005-2006 to 2007-2008 We use a diffs in diffs in diffs approach applied to the following equation y t it d 0 1 it cv 1, it 2005,2006,2007,2008 2 cv 3 2, it it => thus, we analyse the change in speed in emission reduction between the first and the second phase
Results Dependant variable Growth rate of emissions (2008-2007) - Growth rate of emissions (2006-2005) Total Sample(1) AF05 <1.15(2) AF05>1.15(3) Phase dummy -0.036**(0.015) -0.034*** (0.011) 0.002 (0.03) changes in 0.191***( 0.028) 0.19***(0.04) 0.21***( 0.04) turnover changes in labour 0.0007(0.025) -0.03 ( 0.02) 0.07 (0.05) size Adj R-squared 0.17 0.21 0.23 Significance: * at 10%, ** at 5 % and *** at 1%. Standard errors are reported in brackets The tighter cap in Phase II was effective since emissions decrease Under allocated companies in allowances for 2005 reduced their emissions the most
Results Paper and paper products 416 firms Non-metallic minerals 806 firms Basic metals 159 firms Electricty heat 660 firms Phase dummy -0.029(0.027) -0.087***(0.025) -0.095*(0.049) -0.001(0.038) changes in turnover changes in labor size 0.154**( 0.077) 0.299***(0.058) 0.089(0.126) 0.136**(0.06) -0.062 (0.093) -0.046(0.044) 0.099(0.208) 0.012(0.042) Adj R-squared 0.13 0.27 0.71 0.21 Significance: * at 10%, ** at 5 % and *** at 1%. Standard errors are reported in brackets Non metallic minerals and basic metals carried out the main reduction effort No significant effect of moving to a tighter cap for energy and paper sectors
Impact of EU ETS on the firm performance Impact of the EU ETS on firm added value, employment (labour size) and profitability (profit margin) With a matching procedure based on a propensity score, we construct a control group in order to assess this counterfactual effect The following two period fixed effect model (before and after treatment) is then estimated in first differences: y it 0 1 d 1,it 2 d 2,it 3 x it 4 cv it it,t 0,1 y i 1 2 d 2,i 3 x i 4 cv i u i ˆ 2 y T y C
Added Value Dependent variable Added value Total sample (4202 firms) Period (1)= 2004-2005 (2)= 2004-2008 Impact of EU ETS -0.09 (0.08) -0.11 (0.08) Changes in fixed capital 0.08***(0.01) 0.06***(0.01) Changes in employment 0.11***(0.01) 0.10***(0.02) Adj R-squared 0.78 0.83 Under allocated firms (AF<1) (1) 1436 firms (2) 1538 firms Impact of EU ETS -0.04 (0.04) -0.05 (0.06) Changes in fixed capital 0.08***(0.01) 0.11***(0.01) Changes in employment 0.16***(0.02) 0.17***(0.02) Adj R-squared 0.75 0.77 Over allocated firms (AF>1) (1) 2766 firms (2) 2664 firms Impact of EU ETS -0.07 (0.07) -0.12(0.10) Changes in fixed capital 0.05**(0.02) 0.07***(0.02) Changes in employment 0.08***(0.02) 0.09***(0.02) Adj R-squared 0.85 0.77 No impact on added value for the two periods
Profit Margin Dependent variable Profit margin Total Sample Period (1)= 2004-2005 (2)= 2004-2008 Impact of EU ETS -0.53 (0.45) -0.51 *(0.37) Changes in employment -0.59*(0.32) -0.52(0.32) Changes in turnover 3.91***(0.21) 3.67***(0.21) Adj R-squared 0.58 0.62 Under allocated firms (AF<1) Impact of EU ETS -0.22 (0.31) -1.95 *(1.11) Changes in employment -0.42(0.43) -0.34(0.43) Changes in turnover 2.61***(0.27) 2.54(0.27) Adj R-squared 0.51 0.52 Over allocated firms (AF>1) Impact of EU ETS 2.14* (1.25) 2.32 *(1.29) Changes in employment -0.95**(0.50) -0.87*(0.49) Changes in turnover 5.29***(0.35) 5.07***(0.34) Adj R-squared 0.58 0.64 Overallocated firms have benefited significantly from the EU ETS in terms of profitability Underallocated Firms did lose Overall effect surprisingly negative
Employment Dependent variable Employment Total sample Period (1)= 2004-2005 (2)= 2004-2008 Impact of EU ETS - 0.002 (0.002) -0.009 **(0.004) Changes in employment 0.50***(0.002) 0.52***(0.02) Changes in turnover 0.04***(0.02) 0.05***(0.02) Adj R-squared 0.75 0.73 Under allocated firms (AF<1) Period (1) (2) Impact of EU ETS -0.003(0.003) -0.013 (0.095) Changes in employment 0.49***(0.002) 0.50***(0.002) Changes in turnover 0.04***0.003) 0.03***(0.003) Adj R-squared 0.69 0.67 Over allocated firms (AF>1) Period (1) (2) Impact of EU ETS 0.008 **(0.004) -0.004(0.002) Changes in employment 0.52***(0.002) 0.51***(0.003) Changes in turnover 0.05***(0.004) 0.06 ***(0.005) Adj R-squared 0.89 0.57 Overallocated firms have increased slightly their employment level after the launch of EU ETS.
Conclusion Phase II is promising compared to Phase I The magnitude of the impact appears small Limited impact on economic performance Extension 1: Include more years of the ETS to capture longer-term effects such as investments Extension 2: Effectiveness regression performed on a susbsample division that take into account the reduction of allowances distributed in 2008 compared to 2007
APPENDIX
Excess allocation by sector and country
Median Allocation factor SAMPLE REPRESENTATIVENESS France 1,5 1 0,5 Median allocation factor 0 2005 2006 2007 2008 Median allocation factor UK 1,2 1,15 1,1 1,05 1 0,95 2005 2006 2007 2008 Poland 1,3 1,25 1,2 1,15 1,1 1,05 2005 2006 2007 2008 Amadeus companies CITL Amadeus companies CITL Amadeus companies CITL
Median Allocation Factor 1,25 1,2 1,15 1,1 1,05 Spain 1 2005 2006 2007 2008 Amadeus companies CITL
Sectoral and regional distribution (Amadeus Companies) Sectors Number of firms Frequency (%) Other non-metallic mineral products 806 38.36 Electricity and heat 660 31.41 Paper and paper products 416 19.8 Basic metals 159 7.57 Coke and refined petroleum products 60 2.86 Countries Spain 420 19.99 Germany 314 14.95 Portugal 236 11.23 France 199 9.47 Czech Republic 120 5.71 Poland 114 5.43 Italy 113 5.38 Finland 103 4.9 UK-Ireland 85 4.05 Bulgaria- Romania 73 3.47 Sweden 71 3.47 Austria 68 3.24 Belgium-Luxembourg 67 3.19 Slovakia 62 2.95 Netherlands 47 2.24 Denmark 39 1.86 Slovenia-Hungary 33 1.57 Estonia-Latvia-Lithuania 27 1.29
Descriptive statistics Added value Employees Fixed Capital Profit Margin Allocation Factor 1% -1048 2 0-46.69 0.50 5% 470 10 309-17.18 0.75 25% 2343 43 2968 0.05 1.00 Median 8673 150 12125 4.2 1.15 Mean 88541 663 159216 4.5 6.61 75% 35014 447 49279 10.62 1.43 95% 288316 2170 443055 25.37 3.31 Std 389039 2580 909914 14.32 178