Catching Up and Falling Behind: Cross-country Evidence on the Impact of the EU ETS on Firm Productivity

This paper assesses the potential impact of European Union Emissions Trading System (EU ETS) on firm productivity. We estimate a stylized version neo-Schumpeterian model, which incorporates innovation and productivity catch-up as two sources firm’s growth, while at same time accounting for persistent dispersion within industries. dynamic model allows us to differentiate effects EU ETS total factor (TFP) depending level firms’ technological advancement. The identification approach is based difference-in-difference exploiting incomplete participation requirements rich panel structure firm-level data eight countries from 2002 2012. find evidence that policy TFP are highly heterogeneous depend distance frontier, measured highest in each year-industry. Productivity positive firms close but they turn negative operating far behind frontier.