The impact of the UK's withdrawal from the EU ETS on firms' carbon emissions: evidence from the UK ETS

We examine the impact of the United Kingdom's withdrawal from the European Union Emissions Trading System (EU ETS) on firms' carbon emissions following the introduction of the UK Emissions Trading Scheme (UK ETS). Using a matched difference-in-differences approach, we compare UK-regulated firms with a counterfactual group of EU ETS firms to assess whether the implementation of the UK ETS altered emissions behavior during its early stages. Our results indicate no statistically significant effect of the UK's departure from the EU ETS on firms' emissions. Sectoral analysis reveals that, both in the UK and in the EU, energy firms experienced greater average emissions reductions than manufacturing firms, suggesting sector-specific differences in decarbonization incentives and emissions-reduction capabilities. This study contributes to the ongoing discussion on potential linkages between ETSs.Key Policy InsightsOur analysis shows that UK firms have maintained emissions reduction commitments comparable to their EU counterparts during the initial years of the UK ETS.Linking the UK ETS with the EU ETS would provide firms with access to a deeper and more liquid carbon market, reducing administrative burdens and lowering compliance costs, while also mitigating risks of carbon leakage across borders.Early alignment between the UK and EU ETSs is essential: for example, the Swiss-EU experience demonstrates that delays in negotiations increase complexity and the risk of future divergence in system design.A UK-EU ETS linkage would not only strengthen both regions' climate policies but also serve as a precedent for broader international carbon market integration, enhancing efficiency and reducing reliance on unilateral mechanisms such as the CBAM.