Regional impacts of the EU Emissions Trading System (EU ETS): Innovation and technological change in environmental technologies

Abstract

The EU Emissions Trading System (EU ETS) was created to reduce CO2 emissions and to induce both the development of environmental innovation (EI) and the adoption of these innovations. This paper investigates the impact of the EU ETS on EI and green technological change at the regional level. We make use of installation data (regulated stationary technical units) and aggregate CO2 emissions and freely allocated allowances at the NUTS-2 level, covering 292 regions in all three EU ETS periods (2005-2020). Using this dataset, we calculate the annual EU ETS stringency and estimate dynamic spatial panel models to investigate the impact of stringent regional EU ETS regulation on EI and its adoption. Overall, the results imply that a more stringent regional regulation induces EI and promotes green technological change. The effect of the EU ETS on regional EI becomes stronger over time and differs by sector. More stringent regulation in the region’s energy sector is positively associated with increased EI across all models. Stringent regulation in neighboring regions appears to have no effect on EI in a region. Regions that were subject to stricter regulation in the past have a substantially lower CO2 intensity today, implying adoption and green technological change. This effect only becomes apparent after 4 years. Regional factors seem to condition the adoption process. Leading EI regions reduce their CO2 intensity faster than lagging regions under a more stringent EU ETS regulation. Lagging regions, in contrast, significantly reduce their emissions intensity due to spatial proximity to leading regions.