To Örebro University

In January 2005, the EU launched the first international emissions trading system (EU ETS), aimed at reducing carbon emissions in a cost-effective way by means of a market-based instrument. This paper uses the treatment/control, before/after design of the natural experiment approach to investigate the treatment effect of the EU ETS on the profitability of a sample of Swedish energy firms in 2005 and 2006. The author investigates whether over-allocated and under-allocated firms respond differently to the EU ETS. The estimation results in general suggest no significant impact in 2005 and a negative significant impact in 2006. The sub-sample analysis suggests that profitability of over-allocated and under-allocated firms were affected differently by the EU ETS in 2005, but not in 2006.