The political economy of emissions trading

This chapter focuses on the political economy of emissions trading, by examining the sources of heterogeneity among firms in benefitting from climate policy. Using a dataset on industrial plants in the European Union Emissions Trading Scheme (EU ETS), I evaluate the relative importance of industry-wide rent-seeking efforts, firm-affiliation and country-specific context for their ability to capture rents through emissions permits. While my analysis demonstrates that industry-wide efforts can strongly influence the absolute rents that can be captured, firm-specific capabilities further increase performance relative to other companies. My results show that industry-wide rent seeking efforts and firm-specific capabilities act as complements that reinforce each other when firms capture value from their non-market environment. I also find that geographic location within Europe matters, but it is less important than industry- or firm-affiliation. This study provides a novel analysis of the drivers behind differences among firms to use emissions trading schemes to their benefit.