EU carbon pricing cuts emissions, drives green M&As
A new European Central Bank working paper finds that tighter EU climate regulation led high-emission firms to cut emissions and acquire greener targets. The study covers 2,207 EU ETS firms between 2013 and 2023, focusing on a policy shock after 2017.
Emissions fall, output holds steady
An unexpected tightening of the EU Emissions Trading System (EU ETS) after 2017 prompted high-emission-intensity firms to reduce emissions by approximately 13 percent relative to their low-intensity peers.
This reduction was achieved without a decline in operating revenue, leading to an 8.5 percent improvement in emissions per unit of revenue.
Power producers showed the strongest response, cutting emissions by 32 percent, while manufacturing firms achieved a 5 percent reduction.
The study, based on a firm-level dataset of 2,207 EU ETS firms from 2013 to 2023, highlights that these efficiency gains strengthened over time, particularly for power producers, indicating cleaner production rather than simple downsizing.
Acquisitions accelerate decarbonization
The paper identifies corporate mergers and acquisitions (M&As) as a key channel for emission reductions, particularly in manufacturing.
High-emission manufacturing firms significantly increased their acquisition of green targets after the regulatory tightening, without an overall increase in M&A activity, indicating a strategic shift.
These green acquisitions were economically meaningful, contributing to an approximate 11 percent reduction in emissions for firms after completing such deals.
The research found no evidence of carbon leakage through cross-border acquisitions, suggesting that tightening the EU ETS can reduce emissions without simply moving activity elsewhere.
Carbon pricing: A proven lever
This research provides compelling evidence that credible carbon pricing can effectively drive emission reductions without hindering economic output.
The findings underscore the critical role of M&As as a practical and underappreciated mechanism for decarbonization, especially in hard-to-abate sectors.
The absence of cross-border leakage through acquisitions strengthens the case for robust climate regulation.