Contents lists available at ScienceDirect Energy Policy journal homepage: www.elsevier.com/locate/enpol The financial performance of firms participating in the EU emissions trading scheme Georgia Makridou a,* , Michalis Doumpos b , Emilios Galariotis c a ESCP Europe Business School, 527 Finchley Road, NW3 7BG London, United Kingdom b Technical University of Crete, School of Production Engineering and Management, 73100 Chania, Greece c Audencia Business School, Finance Department, 8 Route de la Jonelière, 44312 Nantes, France ARTICLE INFO Keywords: Emissions trading scheme Corporate profitability Energy consumption Multilevel modelling ABSTRACT This study analyses the profitability of firms participating in the European Union Emissions Trading Scheme during the period from 2006 to 2014, covering the three phases of the scheme. The analysis covers a large dataset from 19 European Union countries and with five different modelling specifications. The examined models use firm-specific attributes, country-level data about the economic environment and energy-related characteristics. In particular, the influences of time/firm/country characteristics on profitability are examined by performing cross-classified multilevel modelling. The empirical results show that both economic and energy- related variables significantly influence firms' profitability. Measures such as reducing environmental impacts (verified emissions and allowances allocated) or increasing energy efficiency should be taken into consideration in decision-making for the firm's profitability improvement. 1. Introduction The European Union Emissions Trading Scheme (EU ETS) is con- sidered to be the main pillar of the EU climate policy. The EU ETS, launched in 2005, is by far the largest environmental market in the world. More than 12,000 plants from CO 2 -emission-intensive industries and aviation activities operating in 28 EU member states as well as Iceland, Liechtenstein and Norway are under the scheme. It is the flagship EU policy to reach the Kyoto Protocol target by reducing greenhouse gas (GHG) emissions. More specifically, the official objec- tive of the EU ETS is to “promote GHG reductions in a cost-effective and economically efficient manner” (European Commission, 2003). The EU ETS relies on the principle of “cap-and-trade”, according to which, a limit is imposed on the total amount of GHG emissions that installations participating in the scheme can emit. This amount (cap) is reduced over time with the aim to reduce carbon emissions. Within the cap, installations receive or buy European Union Allowances (EUAs). EUAs can be traded between companies based on their needs. The limit on the total amount of available EUAs gives them a value. Therefore, the EUAs are considered to be the “currency” of the ETS. Firms parti- cipating in the scheme must hold allowances corresponding to the amount of CO 2 they produce. They can either implement measures for emission reduction or buy EUAs from other participants in the EU ETS. Companies need to hold enough allowances in order to comply with all their emissions caps on a yearly basis. In the case that they do not comply with this requirement, they have to pay heavy fines. An in- stallation that reduces its emissions can hold the excess of EUAs to comply with its future needs. Otherwise, it can sell them to those that have a shortage of EUAs. All large, energy-intensive industrial in- stallations are mandated to participate in the EU ETS. However, in some industries, only installations above a certain size can participate. When other measures (environmental or economic) are applied that can re- duce the emissions by a similar amount, small plants can be excluded from the scheme. Since the 1970s, when the first environmental measures were en- forced, there have been debates about their potential effects on busi- nesses. Economists argue that environmental regulations add costs to companies, thus having a negative economic effect. However, an op- posing view is that environmental measures can boost the economic growth of the regulated firms, considering that they promote “green” technological innovations. A rich body of literature has emerged on the influence of environ- mental policies on corporate performance because of the growing im- portance of this debate in environmental management. Filbeck and Gorman (2004), Wagner (2002) and Brouwers et al. (2014) provide overviews of the relationship between environmental and economic performance. Many aspects of economic performance, such as pro- ductivity, innovation, employment, profitability, output and trade, https://doi.org/10.1016/j.enpol.2019.02.026 Received 26 August 2018; Received in revised form 27 December 2018; Accepted 9 February 2019 * Corresponding author. E-mail address: gmakridou@escpeurope.eu (G. Makridou). Energy Policy 129 (2019) 250–259 0301-4215/ © 2019 Elsevier Ltd. All rights reserved. T