EU Climate Policy Study: CO2 Pricing Spurs Emission Reductions in French Industry

The CO2 price is an effective tool in France to reduce emissions in the manufacturing sector. According to a new study by Mannheim economist Ulrich Wagner together with his colleagues Ralf Martin and Mirabelle Muûls from Imperial College London and Jonathan Colmer from the University of Virginia, French producers reduced their emissions of harmful greenhouse gases by an estimated 15 percent – around 43 million tons of CO2 – in the first eight years after the introduction of the EU Emissions Trading System (EU ETS). Nevertheless, the costs of complying with the new climate protection regulation had no negative impact on production.

“The introduction of the EU Emissions Trading System has produced remarkable results in the manufacturing sector in France,” says Wagner. “It is important that the reduction in CO2 emissions has not come at the expense of weaker performance or outsourcing to circumvent European climate policy.” Wagner holds the chair of quantitative economics at the University of Mannheim.

ETS as a driver of technological change
For manufacturers, the CO2 price increases production costs, which could lead to reduced economic activity. The fact that this was not the case is surprising to the scientists involved in the study. One finding of the study is that French companies invested in energy-saving technologies and were thus able to reduce their energy bills. This helped to offset the costs incurred by investing or buying emission allowances. “Despite widespread concerns about the economic costs of climate protection measures, the introduction of the ETS was generally not accompanied by a reduction in production,” says Wagner. “Instead, many companies have invested in new technologies that have reduced energy consumption and the carbon intensity of production. Therefore, pricing pollutants appears to be a good tool for companies to realize potential cost savings and efficiency gains from green technologies.”

Unfounded criticism of the EU emissions trading system
The EU ETS is the world’s first and largest carbon market and works according to the principle of “cap & trade”. An emissions cap is set for certain greenhouse gases. Companies receive or buy emission allowances that can be traded among themselves. The ETS is the most important EU instrument for reducing greenhouse gas emissions from energy companies, energy-intensive industrial plants and airlines. It covers around 10,000 plants – around 40 percent of EU emissions. Critics have described this market-based regulation as ecologically ineffective and economically devastating. “We have analyzed company data in a previously unprecedented level of detail and show that such claims are unfounded,” says Wagner. “The reduction in pollutant emissions in the first eight years of the ETS had no adverse effects on employment or value creation.”