Association of EU ETS, earnings and employment in manufacturing in Finland

Abstract

We have investigated how EU emission trading scheme (EU ETS) has associated to the development of earnings of individual employees who have worked in regulated manufacturing factors in Finland when the policy started in 2005. Their earnings are compared to earnings of individuals, who worked in same sectors, but in smaller installations that were not regulated by the policy. The follow-up of individuals between 2000-2016 shows that the workers in EU ETS sectors had on average EUR 5 000 higher annual earnings compared to the control group before the policy started and this difference was diminished by an average EUR 2 800 after the policy started. It seems that this decrease is due to lower employment rate. The treatment group had more than 4 percent unit lower employment rate compared to the control group, which in 2016 translates into 7.5 % lower employment. The earnings of those who were employed decreased by EUR 2 300 when the policy started, but otherwise the employed employees had EUR 5 000 higher earnings compared to the control group also after the policy started. Our set-up doesn’t allow a full causal interpretation that the decrease if fully influenced by the policy, as different industrial sectors are disproportionally represented in the treatment and control group. The previous literature has shown 2 percent decrease in employment and no effect on wages at company-level. At installation-level the effect on employment has been a 7 % decrease, which is in line with our result. We have used individual-based data on annual earnings, which have included information of working station, which was matched to the information of installations’ participation to the policy. As participation to EU ETS is determined at installation-level, our set-up allows more precise results than those conducted at company-level. The result seems to support pollution haven -hypothesis, which states that the policy makes regulated entities less competitive due to increased costs, and therefore production or market shares are outsourced to regions with laxer environmental policies.