European climate policy and industrial relocation : an assessment of the ecological and managerial impact of the EU ETS on European manufacturing

Do abatement costs from CO2 emissions affect a firm’s choice to relocate, by that creating carbon leakage? The aim of this thesis is to investigate the accuracy and effectiveness of climate policies in the European Union and thus to question the current allocation mechanism for sectors that deemed to be exposed to carbon leakage. The relationship between abatement costs and relocations risks is assessed by exploiting firm level data on relocations risk and macro level data on CO2 emissions. Utilizing the fixed effects model approach, a negative effect of abatement costs on relocation risks of those companies that cut CO2 emissions was found. These finding implies that no evidence for carbon leakage could be drawn from the results and confirms the results of previous research. Two fundamental areas were identified that need to be understood and to be addressed in future research. First, the allocation mechanism of certificates that is being used in the EU needs to be revised since companies are facing an overallocation of certificates while having a low risk of relocation. Shrinking the pool of allowanced available for free allocation would be one potential angle for a substantial change. Secondly, by overcoming the information asymmetry between regulator and regulated, other factors despite facing political restrictions and abatement costs must exist that discourage decision-makers from relocating production facilities abroad. Other variables that might impact the competitive position of sectors should be addressed in future research such as energy costs, labor costs etc. This thesis emphasizes the need for re-opened a debate about the measures to address carbon leakage in the future, including an expansion of options to address this issue. One option could be, instead of overallocation sectors, to reflect upon how best to enforce initiatives for the implementation of “greener” technologies in order to achieve cost savings for companies while limiting CO2 emissions on the long run.nhhma