EU ETS and Investment Decisions:: The Case of the German Electricity Industry

In 2005, the EU launched the European Emission Trading Scheme (EU ETS) to reduce CO2 emissions and spur low carbon investments. There is only little empirical evidence regarding its actual effects on corporate investment decisions. We investigate these effects in case studies in the German electricity sector. We find that companies in the sector integrate costs for CO2 in their investment decisions. The EU ETS constitutes a main driver for small-scale investments with short amortization times. Its impact on large-scale investments in power plants or in R&D efforts is limited. To overcome this weakness, policy makers should reflect their long-term reduction intentions in the scarcity of allowances, provide more incentives to increase efficiency, and reduce regulatory uncertainty.