EU ETS Fourth Phase Firm-Level Effects : An Exploratory Study of Implications for Swedish Industry within the EU ETS

Abstract: The European Union Emission Trading System (EU ETS) is the cornerstone of the EU's transition to climate neutrality by 2050. Significant carbon price increases and ambitious changes to the ETS make phase four (2021-2030) uncharted territory. This thesis exploratively investigates how the EU Emission Trading System (ETS) currently affects Swedish firms’ competitive position within the European Union and how these firms respond to the carbon price. This is done through a qualitative approach with a thematic analysis of findings from interviews with nine Swedish firms within the sectors: Combined Power and Heat generation (CHP), Electricity production, Mining & Refining, and Smelting of iron and steel and of ferroalloys. Our findings show unanimous support for the Emission Trading System as an instrument to reduce carbon emissions, yet significant differences in each firm's response to the carbon price. Uncertainty related to future price development is found to cause difficulties in pricing among firms within the CHP sector. In contrast, firms with free allocation of EU Allowances have limited financial impact. Across the board, the ETS drives clean technology innovation by making fossil technology less appealing. Nonetheless, two instances of competitive losses stemming from system design were recognised: 1) Swedish CHP producers bear emission costs that other European producers do not, as a result of Sweden’s opt-in of the CHP sector, potentially causing carbon leakage within the EU; 2) The maintained division between the manufacturing of iron pellets (NACE 07.10) and sinter (NACE 24.10) keeps benchmarks for sinter high, resulting in less incentive for abatement efforts within EU. This thesis adds to the existing literature by identifying skewness in the harmonisation of the EU ETS and investigating signals to which the firms respond.