Firms’ Preferences for Carbon Market Design in the EU

slovenian

By Federica Genovese and Endre Tvinnereim

 

The recent UN SR15 report is a plea for a fast implementation of effective regulatory action on climate change. In most countries this will require the buy-in of businesses. Clearly businesses – especially in liberal democracies, but not only – have varying preferences for regulation that needs to be understood to properly calibrate policy. But neither the public nor bureaucrats and policy makers necessarily have information about these regulatory preferences. While we do know that there is variation in how corporations position themselves towards climate regulation and that sometimes they would be willing to support market-based policy, we don’t know under which conditions businesses buy into a policy, and what reactions they may have to changes to that policy.

 

To answer some of these questions, we study business preferences for one specific cross-national regulation: the European Union Emission Trading Scheme (EU ETS), which is the biggest and oldest regional system for trading greenhouse gas emission allowances. We use data from an exclusive, proprietary opinion survey of carbon market participants to obtain numerical and qualitative measures of regulated companies’ opinions on this framework of cap-and-trade. Furthermore, we exploit one important feature of the EU ETS – namely the fact that the policy was initially set with small caps and large quantities of free permits, and that the number of permits has declined over time with more sold at auction, tightening the regulation’s grip on industry. Put differently, we exploit the temporal change in expectations on the strictness of the EU ETS policy across the years of the survey at our disposal (2008-2013).

 

In a forthcoming articlewe show that firms’ positions towards international climate change regulation vary along its time dimension. Corporate opinions on carbon trading are specifically divided in two. On the one hand, we find relatively positive sentiment towards cap-and-trade regarding questions of efficiency and maturity of the initial, more lenient state of the policy. On the other hand, concerns regarding future policy costs emerge with respect to the stringency of the CO2 price in the long run and the possibility of relocation.

 

We also find that both firm- and sector-level emissions are correlated with the positions over these two dimensions. At the firm level, high-emission companies are more likely to support the EU ETS at its initial stage, but they are also more likely to consider moving their production abroad in the longer run if CO2 prices may rise. At the sector level, we find that higher volumes of industrial emissions are also associated with more support for the initial stage of the EU ETS. Additionally, we find that higher sectoral emissions negatively influence firms’ considerations of disinvestment and relocation.

 

In conclusion, we find a relatively complex set of corporate opinion on a key regulatory tool related to climate change. Generally, however, we find greater support at earlier and more lenient stages, while larger firms also tend to support greenhouse gas cap-and-trade more than smaller firms. For policymakers in Europe and elsewhere, our findings have two implications. First, the wide variation in business interests over climate regulation indicates that policy makers can tailor policies in such a way that majority coalitions in favor of emission reduction instruments will quickly emerge. However and secondly, our study indicates that distributional climate policies may lose credibility if the need for business support implies that the regulation does not engender the desired transformation needed for effective and meaningful decarbonization.

 

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Federica Genovese is Assistant Professor of Political Science at the University of Essex (UK) and an ISEP fellow.

Endre Tvinnereim is Senior Researcher at NORCE Norwegian Research Centre and the Centre for Climate and Energy Transformation at the University of Bergen.

 

Photo: Emissions from Slovenian factory (© Wikimedia commons)