The impact of the european emission trading scheme on labor productivity

Analyzing the effects of the ETS on firm performance is crucial because it al-lows us to understand the real consequences of one of the most important European environmental policies. This study investigates the effects of the EU-ETS on various indicators of Italian manufacturing firms’ performance, such as labor productivity, revenues, employment and value added on sales ratio, within. Using company data spanning from the inception of the system in Italy in 2006 to the conclusion of Phase 3 in 2020, we employ a novel Difference-in-Differences (DID) approach with multiple periods and multiple groups, drawing on the methodology proposed by Callaway and Sant’Anna (2021). The objective is to assess the causal impact of the EU ETS across three treatment groups corresponding to the three entry points into the regulatory system: first phase (2006), second phase (2008), and third phase (2013). The comparison is made against firms in the same sectors that were never subject to the regulation, serving as the control group. Our findings reveal that the EU ETS spurs labor productivity growth, albeit with varying effects contingent on firms' entry timing. The boost in productivity appears to be driven more by workforce reduction than by an increase in output, potentially due to outsourcing. This is evidenced by negative effects on the value-added/sales ratio, suggesting a shift towards a more fragmented production structure.