Eva Franzmeyer

This paper examines the determinants of firms’ investments in energy efficiency, focusing on the role of regulation under the EU Emissions Trading System (EU ETS). Using detailed German firm-level data, I investigate whether these investments are primarily driven by regulatory incentives or by firms’ self-selection based on their characteristics. I develop and estimate a dynamic structural model of firms’ investment decisions in which firms’ inclusion in the EU ETS depends endogenously on their emissions. Counterfactual analyses show that both regulatory incentives and firm selection shape investment outcomes, with firm-specific characteristics determining which effect dominates. At the aggregate level, the decomposition analysis reveals that regulatory incentives account for only a small portion of total investment. Regulation also generates heterogeneous effects on firm output, varying with firm size and prior investment.

This study provides causal firm-level estimates of the effect of a reduction in free emission allowances in emission trading systems on emissions and economic performance. We study an EU ETS reform that withdrew the right of some manufacturing firms to receive most emission allowances for free, exploiting this change in a differencein-differences setting. We find that paying for allowances decreased emissions by more than 11 percent overall, relative to firms that retained free allowances. This reduction was accompanied by a significant decrease in economic performance, including revenue, employment, and assets of a similar magnitude. Using a multi-product model, we show that our results can be rationalized through an extensive margin adjustment of firms.

This paper evaluates whether taxing the consumption of brown goods is more effective and welfare-efficient than taxing their production. I develop a semi-endogenous growth model with two final goods, green (low-carbon) and brown (carbon-intensive) which are imperfect substitutes in household preferences. I compare three policies: a consumer tax on brown goods, a producer tax on brown inputs, and a subsidy for green innovation. The consumer tax results in a modest welfare loss (-40%) but achieves the largest reduction in brown output (-563%). Relative to the consumer tax, the producer tax entails higher welfare costs and smaller reductions in brown output. By contrast, the research subsidy generates a welfare gain while substantially curbing brown output. These findings suggest production-side taxes are least favorable, while consumer taxes and innovation subsidies reduce emissions at lower welfare costs or even deliver welfare gains.