Estimation of the effect of the European carbon market on the French manufacturing industry - Focus no. 101, November 2023

The European Union's Emissions Trading Scheme (commonly known as the European Carbon Market) is a program that regulates only large emitting installations. There are therefore differences from one company to another within the same sector, and even from one plant to another within the same company. To assess the effects of such policies, which are not universally applied, we often compare the earnings trends of regulated companies with those of unregulated companies in the same sector but with similar characteristics, using the conventional double-difference estimator. However, if companies compete in the same market, all models of imperfect competition predict that the effects of industrial regulation will be passed on to regulated and unregulated companies through prices. As a result, conventional double-difference estimators cannot correctly identify treatment effects, as the results of control firms are contaminated by the regulation under study. This Focus presents a new method for estimating the treatment effects of incomplete regulation in the presence of inter-firm spillovers. The results show that, although regulation has increased the cost of energy, the EU ETS has not put regulated companies at a disadvantage: their annual sales have risen by between 5% and 10%. At the same time, we note that CO₂ emissions have fallen by an average of 6% to 21%, depending on the year, in regulated plants. Overall, we find that the ETS has reduced CO₂ emissions generated by French manufacturing companies in the production of goods for the domestic market by between 1 and 6.1 million tons per year, or between 3% and 17% of observed national emissions, compared to a counterfactual scenario without regulation