Environmental Policy and Directed Technological Change: Evidence from the European Carbon Market

This paper investigates the impact of the European Union Emissions Trading System (EU ETS) on technological change, exploiting installations level inclusion criteria to estimate the System's causal impact on firms' patenting. We find that the EU ETS has increased low-carbon innovation among regulated firms by as much as 10%, while not crowding out patenting for other technologies. We also find evidence that the EU ETS has not affected patenting beyond the set of regulated companies. These results imply that the EU ETS accounts for nearly a 1% increase in European low-carbon patenting compared to a counterfactual scenario.