The impact of EU-ETS on trade: Evidence on Italian manufacturing firms

The European Union Emissions Trading Scheme (EU-ETS) imposes a price on carbon emissions of about 11,000 industrial installations in Europe by setting an overall cap in emissions and letting operators exchange emission permits on a dedicated market. This additional burden on firms might reduce the international competitiveness of European firms, increase the risk of carbon leakage and, in turn, impair the effectiveness of the policy. Emission permits were distributed free of charge in the first two phases (2005-2012) of the EU-ETS. In Phase III of the policy (2013-2018), instead, installations needed to purchase permits at auction; however, installations operating in sectors particularly exposed to carbon leakage kept on receiving a certain amount of permits free of charge. This paper aims to assess the impact of this policy change on productivity and trade performance of Italian manufacturing firms. We follow a local DID identification strategy, and we complement our exercise with two alternative empirical approaches also within based on the difference-in-difference framework. Our results point to a negligible effect of the policy change on either TFP, trade or emissions (among firms subject to the EU-ETS). This suggests that the auction mechanism introduced in Phase III of the policy did not reduce the competitiveness of Italian manufacturing firms on the international markets.