Estimating Environmental Compliance Costs at the Installation Level

We develop a new measure of installation-level environmental compliance costs under an Emissions Trading System (ETS) by estimating normalized demand curves of permits sector-by-sector. Our measure reflects installation-level compliance costs deviations within-sector and it is scaled by both the installation’s baseline output and the sector-specific abatement efficiency. An application to four sectors in Phase 3 of the EU ETS unveils a non-negligible within-sector variance and reveals that the installation-level dimension explains the largest part of it, while the country effect accounts for 7.7% to 11.4% of the total within-sector variance. This points to the installation-level dimension as mostly important when the impact of environmental regulations has to be assessed in practice