Epsilon Archive for Student Projects

Abstract

This thesis examines whether stronger exposure to the European Union Emissions Trading System (EU ETS) is associated with higher renewable energy shares across industrial sectors. Using panel data covering European industrial sectors between 2005 and 2024, the analysis combines sector-level measures based on verified emissions and freely allocated allowances with EU ETS carbon prices to construct a continuous measure of effective carbon-cost exposure.

The empirical results indicate a positive relationship between effective ETS exposure and renewable energy shares. The preferred specification suggests that stronger carbon-cost exposure is associated with modest but economically meaningful increases in renewable energy use relative to the sample average. Dynamic specifications further indicate that these adjustments occur gradually over time, with the strongest responses emerging approximately two to three years after changes in exposure. Robustness checks show that the positive relationship remains broadly consistent across alternative specifications, although the estimated magnitudes vary depending on sample composition, lag structures, and the treatment of negative exposure values.

The findings suggest that carbon pricing may contribute not only to emissions reductions, but also to gradual changes in the composition of industrial energy use. More broadly, the results imply that firms may respond to carbon-cost incentives by adjusting their own energy systems over time, highlighting the potential role of emissions trading systems in supporting industrial energy transitions. The estimated relationships should, however, be interpreted cautiously and not as definitive causal treatment effects.