EU ETS Phase IV and Industrial Performance

This article studies the reaction of sectors regulated by the European Emissions Trading Scheme (EU ETS) to the announcement of Phase IV. Using a Difference-in-Differences approach and data from 347 sectors located within the OECD over the period 1995-2019, we show that regulated sectors reacted immediately after the announcement by gradually increasing their R&D spending. Furthermore, these increases in investment boosted the competitiveness of firms in the regulated sectors through higher output, despite a reduction in total employment. Consequently, our results show that the EU ETS leads to a progressive substitution of labor by more productive capital. Overall, we provide evidence on firms' responses to Phase IV of the EU ETS.