The transition to net-zero operations requires effective policy instruments that drive industrial decarbonisation without undermining economic performance. The United Kingdom Emissions Trading System (UK ETS) is a market-based cap-and-trade mechanism designed to reduce greenhouse gas emissions. However, limited empirical evidence exists on its financial implications for emissions-intensive firms. The present study evaluates the causal impact of the UK ETS on firm profitability and liquidity in carbon-intensive sectors. A panel dataset of London Stock Exchange-listed companies, covering firm-level financial and verified emissions data from 2017 to 2024, is analysed. Propensity Score Matching is employed to construct matched treatment–control pairs. Post-policy effects are subsequently estimated using a matched Difference-in-Differences design, with Return on Assets (ROA) as the primary outcome and the liquidity ratio (working capital/total assets) as the secondary outcome. The results show that the UK ETS had no meaningful impact on firm profitability (ROA) or liquidity (WC/TA) for emissions-intensive firms. Collectively, these effects suggest that emissions-intensive firms absorbed compliance costs without short-run deterioration in financial performance. This preservation of financial headroom enables the implementation of life-cycle engineering (LCE) measures across design, production, use, and end-of-life, thereby reducing whole-life emissions while maintaining financial resilience and supporting sustainable growth.
Nanda et al. (Thu,) studied this question.