Do Carbon Markets Undermine Private Climate Initiatives?

We study commitments to reduce emissions by firms subject to the European Union Emission Trading System (EU ETS), the world's largest cap-and-trade program. Commitments are associated with a drop in the number of carbon allowances surrendered, consistent with firms taking actions to reduce their emissions. However, firms subsequently increase their sales of allowances on the secondary market, transferring the right to pollute to others and potentially leaving aggregate emissions unchanged. Despite this, firms benefit from commitments via higher ESG scores. Evidence suggests that proceeds from allowance sales are not used to offset abatement costs for non-EU operations or to invest in green technology. Our findings underscore the importance of considering the interaction between carbon markets and private climate initiatives.