The European Central Bank published research in its Economic Bulletin assessing how EU Emissions Trading System (EU ETS) carbon pricing has affected European investment in the short term. The analysis finds that carbon price increases are associated with a temporary diversion of greenfield foreign direct investment (FDI) away from Europe and a decline in domestic investment, while noting that longer-term benefits of cleaner energy and reduced fossil-fuel dependence are outside the scope. Using data from 2003-19, the box identifies carbon price shocks via changes in emissions-allowance futures prices around ETS regulatory changes and estimates impacts on greenfield FDI and gross fixed capital formation. A shock calibrated to raise the energy component of the producer price index by 1% (equivalent to a 25% rise in carbon futures prices on impact) is associated with a significant rise in European greenfield FDI into non-European countries, a fall in European inward greenfield FDI including within-Europe flows that continue to contract over the medium term, and a 0.5% decline in EU gross fixed capital formation in the first year with a cumulative fall of more than 1% after two years, albeit with high uncertainty. The decline is driven mainly by construction, transportation and manufacturing, while mining and quarrying show no significant response, which the authors link to the rollout of free allowances; the box also situates the findings alongside evidence of limited carbon leakage and notes the European Commission’s carbon border adjustment mechanism as part of the broader policy landscape.
European Central Bank 2025-01-09
European Central Bank research links EU ETS carbon price increases to a temporary dip in EU investment and a shift in greenfield FDI away from Europe
The European Central Bank's research in its Economic Bulletin examines the short-term impact of EU Emissions Trading System carbon pricing on European investment. Findings indicate that carbon price increases temporarily divert greenfield foreign direct investment from Europe and reduce domestic investment, particularly in construction, transportation, and manufacturing. The study highlights a 0.5% decline in EU gross fixed capital formation in the first year, with a cumulative fall of over 1% after two years, while noting the broader policy context including the European Commission’s carbon border adjustment mechanism.