European Central Bank publishes working paper finding tighter EU ETS rules cut emissions and increased green takeovers

The European Central Bank has published a working paper examining how firms responded to the post-2017 tightening of the European Union Emissions Trading System. Using firm-level data for 2,207 EU ETS firms from 2013 to 2023, the paper finds that firms with higher pre-2017 emissions intensity cut emissions by about 13% relative to less exposed peers in the same industry, without reducing operating revenue, implying improved emissions efficiency rather than lower output. The effect was much stronger for power producers, which reduced emissions by roughly 32%, than for manufacturing firms, which reduced emissions by about 5%. The paper also identifies mergers and acquisitions as an adjustment channel, especially in manufacturing. More emissions-intensive manufacturing firms did not increase the overall number of acquisitions after the tightening, but they did shift toward greener targets, and firms that completed a green deal reduced emissions by roughly 11%. Excluding firms that ever made a green acquisition reduced the estimated emissions response by about one-sixth in both power and manufacturing, suggesting that green takeovers contributed meaningfully to decarbonization. The paper also finds no evidence that firms responded by increasing acquisitions outside the EU ETS area, which would have pointed to carbon leakage through the M&A channel, and no material sign that financial constraints weakened the green acquisition response during the period studied.