Little evidence of investment leakage due to EU emissions trade – analysis

There is so far little evidence that German companies whose CO₂ emissions are limited by the EU Emissions Trading Scheme (ETS) are responding by setting up production facilities outside the EU, writes Mercator Research Institute on Global Commons and Climate Change (MCC) based on a new study published in Energy Economics. The researchers used the Bundesbank’s (central bank of Germany) confidential database on direct investments to determine for both affected and non-affected companies how their investments outside the EU have developed. "For the vast majority of German companies under the EU ETS which are internationally active, there is no causal increase in investment in countries outside the EU," says MCC researcher Nicolas Koch. "In the energy-intensive sectors, the effect is particularly small – which is plausible, because capital costs are usually high and relocations are thus expensive.”

Over the years, German industry has repeatedly warned of carbon leakage – a phenomenon in which, due to the costs associated with climate policies, emitters of greenhouse gases outsource their operations to jurisdictions with less stringent emissions rules. This can lead to both reduced employment in the jurisdiction with the stricter carbon pollution policies and higher overall emissions. To combat this, governments can exempt or relax some regulated entities or sectors from carbon emissions reduction rules. For example, the EU Emissions Trading Scheme (ETS) distributes a higher share of free emissions allowances to economic sectors and sub-sectors deemed most at-risk of carbon leakage, mainly energy-intensive industries.