The cornerstone of EU climate policy: does it impact innovation? Long-term evidence from the Swedish Pulp and Paper Industry

Abstract: The EU Emissions Trading System (ETS) is a cornerstone of the union’s strategy to mitigate climate change and innovation is integral to emissions reduction, as well as an aim of the policy. To study if the EU ETS is associated with increased innovation, the Swedish Pulp and Paper Industry (PPI) poses an interesting case. Not only is Sweden itself a leading innovator, but its PPI have rapidly reduced emissions in recent decades, compared to other Energy-Intensive Industry covered by policy in the country. From this view, the thesis aims to contribute to the literature about the impact of the EU ETS on innovation by presenting what is likely the hitherto first estimate that uses Literature-Based Innovation Output (LBIO) data, which is arguably a stronger indicator than R&D and Patent indicators that are used in previous studies. To enable this, the study constructs a dataset comprising of a treatment and a control group, where long-term LBIO data from the SWINNO database is used. To estimate the association, the dataset is employed in a Difference-in-Differences regression model for the years 1991-2018, where the EU ETS was implemented in 2005. It was found that the EU ETS has no association, or possibly a weak positive association with innovation in the Swedish PPI, which confirms the main finding of the previous research that covers other industries and countries as well. Moreover, it is proposed that the EU ETS led to a low additional price increase of emitting carbon dioxide for the pulp and paper firms, compared to the price before it was implemented when the price of fossil fuels and the Swedish Carbon Tax likely were important factors. Thus, potentially explaining the low association of the EU ETS with increased innovation in the Swedish PPI.