Effects of European emission unit allowance auctions on corporate profitability. (September 2020) - Carratù, Maria
Abstract: During Phase 3 of the EU Emission Trading System (ETS), to remedy the so-called windfall profits obtained by companies that benefited from the free allocation of emission permits, the EU introduced an auction-based method for the allocation of carbon emission allowances. We estimate the effect on firms' profits from participating in auctions during Phase 3 of the EU ETS using a propensity score matching approach. The work shows that the introduction of the new market mechanism for allocating carbon emission allowances has no significant effect on corporate profits, whatever the measure of profitability used. From a policy standpoint, this result seems to suggest that this new allocation mechanism might fail to improve the incentives for companies to increase their production cost efficiency or to invest in breakthrough technologies that reduce CO2 . The rather flat auction price trend seems to support this conclusion. Highlights: We estimate the effect on firms' profits from participating in auctions during Phase 3 of the EU ETS. Using a propensity score matching approach we find that the new market mechanism has no significant effect on profits. The failure of the allowance auction reform is confirmed on a large set of profitability measures. Auctions might fail to improve the incentives for companies to invest in breakthrough technologies that reduce CO2 . We report some explanations for this policy ineffectiveness put forward by the literature.