The Effect of EU ETS Indirect Cost Compensation on Firms Outcomes

Abstract

This report evaluates the impact of the EU Emission Trading System (EU ETS) indirect cost compensation on firms economic performance and competitiveness, seeking to assess potential competition distortions and carbon leakage risks produced by the policy. The analysis is run on the sample of businesses operating in any of the sectors eligible to compensation and on the aluminium sector alone. The data employed in the evaluation is at the firm level and comes from the records on the beneficiaries of indirect cost compensation provided by DG COMP and from the Orbis Bureau Van Dijk database. Competition distortion is measured in terms of the effects of the intervention on per worker measures of turnover and value of total assets. The risk of carbon leakage is evaluated on the basis of firm-level indicators of turnover, value of total assets and number of employees. The results suggest that receiving compensation for indirect costs does not have a statistically significant impact on labour productivity of firms in comparison to those that do not receive funding. Conversely, the evidence points to a negative effect on performance measured in terms of turnover, value of total assets and employment. This might be due to a multitude of factors that affect firms’ economic performance, for instance differences in energy costs across countries that do not provide compensation compared to MS that foresee this type of aid. As far as the analysis on aid intensity is concerned, which only contemplates a more homogeneous pool of firms operating in aiding countries, higher compensation amounts do not seem to generate competition distortion. At the same time, a higher level of subsidies appears to marginally reduce the risk of carbon leakage, as performance measured in terms of turnover, value of total assets and number of employees improves. Estimated coefficients suggest that, for each 1% increase in the amount of the subsidy received (i.e. around 1,000 EUR), firms expand their turnover and their assets value by 0.01%, and their workforce by 0.07%. The report also provides some suggestions on future data collection and reporting provisions, aimed at reducing cost, facilitating data management and increasing the quality and level of accuracy of future evaluations.JRC.I.1-Monitoring, Indicators & Impact Evaluatio

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