Carbon trade-offs: how firms respond to emission controls

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🗞️ Driving the news: A new research shows carbon pricing mechanisms are effective in curbing firms' carbon emissions but they may inadvertently discourage long-term green innovation
• Mechanisms like emissions trading and carbon taxes often prompt firms to opt for immediate but temporary solutions like direct emissions reduction, rather than long-term sustainable technologies

🔭 The context: The study offers a theoretical framework investigating the incentives created by carbon pricing for firms and how they respond to them

🌎 Why does it matter for the planet: The shift in firms' investment mix towards short-term abatement can delay the necessary transition to more sustainable technologies
• However, introducing subsidies for green innovation can partially counter this shift and, overall, can boost firms' green investment

⏭️ What's next: The model suggests limiting the distribution of free carbon credits, making firms more committed to green investment

💬 One quote: "A first insight of our analysis is that carbon pricing effectively leads to a reduction in firms’ net carbon emissions compared with laissez-faire, which is consistent with the available evidence." ( Francesca Zucchi, European Central Bank Directorate General Research)

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