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The effects of the Emissions Trading System on European investment in the short run

Author

Listed:
  • Longaric, Pablo Anaya
  • Di Nino, Virginia
  • Kostakis, Vasileios

Abstract

This box investigates empirically the short-run effects of the European Union Emissions Trading System (EU ETS) on European gross fixed capital formation and European greenfield foreign direct investment (FDI) in the period 2003-19. While the EU ETS lowers greenhouse gas emissions by reducing entitlement rights and pricing them competitively, it can result in short-term cost disadvantages compared with foreign competitors, jeopardising and/or diverting investment away from Europe, as it is similar to a tax levied on companies operating in Europe. The empirical analysis in this box focuses on the impact of carbon price shocks and documents a small short-term drop in investment, driven by carbon-intensive industries, and a temporary decrease in greenfield FDI in Europe. At the same time, empirical evidence on the long-term impact indicates that the ETS also provides incentives for firms to invest in reducing the carbon intensity of their production processes and adopting more efficient technologies, increasing European energy independence. JEL Classification: Q48, Q58, F21, E22

Suggested Citation

  • Longaric, Pablo Anaya & Di Nino, Virginia & Kostakis, Vasileios, 2025. "The effects of the Emissions Trading System on European investment in the short run," Economic Bulletin Boxes, European Central Bank, vol. 8.
    • Handle: RePEc:ecb:ecbbox:2025:0008:2
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    References listed on IDEAS

    as
    1. Diego R. Känzig, 2023. "The Unequal Economic Consequences of Carbon Pricing," NBER Working Papers 31221, National Bureau of Economic Research, Inc.
    2. Brand, Claus & Coenen, Günter & Hutchinson, John & Saint Guilhem, Arthur, 2023. "The macroeconomic implications of the transition to a low-carbon economy," Economic Bulletin Articles, European Central Bank, vol. 5.
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    More about this item

    Keywords

    carbon pricing; FDI; Greenhouse gas emissions; investment;
    All these keywords.

    JEL classification:

    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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