(The) impact of ETS on firm performance in Korea

Abstract

The Korean government has been implementing the Korea Emissions Trading System (Korea ETS) since 2015 as a key policy instrument to mitigate climate change. At the end of the second commitment period of Korea ETS, this study tries to assess its impact on major GHG intensive industries of Korea and discusses its future directions. In particular, using the difference-in-differences (DID) method, it examines the Return on Assets (ROA) and Return of Equity (ROE) of firms in the energy, primary metal (steel and nonferrous metal), and cement sectors, which together account for more than 70% of emissions allowances, to examine sector-specific average treatment effect of ETS participation. Contrary to popular belief, Korea ETS is found to have had a positive effect on the primary metal sector, while it is found to have had no statistically significant effect on the energy and cement sectors. This study suggests that more accurate and sector-neutral allocation is needed as the over-allocation of allowances in the steel sector appears to have led to abnormal returns during the 1st compliance year of Korea ETS.