Propagation of Environmental Regulation Shocks via Supply Chain Networks: The Impact of EU ETS on US Firms' Financial Performance
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A growing literature surrounding the propagation of adverse shocks from natural disasters and climate change through supply chain networks suggests global supply chains are avenues for transmitting risk and financial harm. Less attention has been paid to the propagation of environmental regulations through these networks. I evaluate the impact of the European Union Emissions Trading System (EU ETS) on North American suppliers and customers. The EU ETSis a multi-country cap-and-trade program. Firms regulated under ETS incur costs from abatement and purchase of emissions permits. Using a difference-in-difference (DID) model specification, I find that upstream impacts are indeterminant, while clear and sizable negative effects exist for downstream measures of economic performance. Most notably, I find around a 14% average decline in profitability among directly connected downstream firms relative to non-connected and more distantly connected firms. My results imply that the full costs of ETS are not limited to regulated firms and significantly affect global production.
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Turvey, Calum