European climate policy and industrial relocation : an assessment of the ecological and managerial impact of the EU ETS on European manufacturing

2019

Do abatement costs from CO2 emissions affect a firm’s choice to relocate, by that creating

carbon leakage? The aim of this thesis is to investigate the accuracy and effectiveness of

climate policies in the European Union and thus to question the current allocation mechanism

for sectors that deemed to be exposed to carbon leakage. The relationship between abatement

costs and relocations risks is assessed by exploiting firm level data on relocations risk and

macro level data on CO2 emissions. Utilizing the fixed effects model approach, a negative

effect of abatement costs on relocation risks of those companies that cut CO2 emissions was

found. These finding implies that no evidence for carbon leakage could be drawn from the

results and confirms the results of previous research. Two fundamental areas were identified

that need to be understood and to be addressed in future research. First, the allocation

mechanism of certificates that is being used in the EU needs to be revised since companies are

facing an overallocation of certificates while having a low risk of relocation. Shrinking the

pool of allowanced available for free allocation would be one potential angle for a substantial

change. Secondly, by overcoming the information asymmetry between regulator and

regulated, other factors despite facing political restrictions and abatement costs must exist that

discourage decision-makers from relocating production facilities abroad. Other variables that

might impact the competitive position of sectors should be addressed in future research such

as energy costs, labor costs etc. This thesis emphasizes the need for re-opened a debate about

the measures to address carbon leakage in the future, including an expansion of options to

address this issue. One option could be, instead of overallocation sectors, to reflect upon how

best to enforce initiatives for the implementation of “greener” technologies in order to achieve

cost savings for companies while limiting CO2 emissions on the long run.