Environmental versus economic performance in the EU ETS from the point of view of policy makers: A statistical analysis based on copulas

The European Union Emissions Trading System (EU ETS) was created with the aim of promoting reductions of greenhouse gas emissions in a cost-effective and economically efficient manner. In line with this objective, when making their decisions, policy makers should consider not only the CO2 reduction targets but also the influence of these pollution reduction goals on companies' economic performance. This paper analyses the relationship between the economic and environmental performance of a sample of Spanish companies involved in the EU ETS in order to provide more information to the institutions responsible for developing these policies. This relationship is considered from two perspectives: the first examines how a company's production affects the ratio of the level of emissions to allocated allowances (the EA ratio), while the second examines how the EA ratio affects company results. A statistical methodology based on copulas is used, which allows us to analyze the relationship between these variables without requiring the assumptions of joint normality and linearity, thus providing the study with greater flexibility and realism. Our results highlight the existence of three different periods that correspond to Phases I, II and III of the EU ETS. During Phase I (2005-2007), the relationship between the EA ratio and firms' production and profitability was weak and, in the case of production, not significant. In Phase II (2008-2012), the efficiency of the EU ETS was higher, the allocations were better adjusted to firms' activities, and firms with EA values close to 1 were the most productive and profitable. The same trend occurred in Phase III (2013-2015), where a significant reduction of CO2 emissions levels was observed but with higher EA values, especially in the Energy and Other Manufacturing sectors (including the Food, Textile, Leather, Footwear and Clothing, and Rubber and Paper industries). Therefore, although the environmental policy promulgated by the EU ETS is partially achieving its goal of reducing CO2 emissions, it is still necessary to encourage green investments in order to decrease the EA levels, which are too high to satisfy the European Union Allowances allocation policy. (C) 2017 Elsevier Ltd. All rights reserved.