Policy stringency as a decisive driver of emission reductions

18 August 2025

Professor Luca Taschini, Leonardo Bortolan, Lorenzo Prosperi, and Luca Zanin present their latest research on the critical role of policy in driving emissions reductions across European industries.

Smoke coming out of an industrial chimney against a cloudy sky

Policy stringency is the most decisive driver in emission reduction decisions

This study analyzes data from over 6,000 firms regulated under the EU Emissions Trading System (EU ETS) between 2013 and 2021. It finds that, while firms’ year-on-year emission reduction decisions are shaped by various factors — including financial conditions, technological constraints, and firm-specific characteristics — policy stringency emerges as the most decisive driver.

A firm-level measure of policy stringency

The authors introduce a firm-level measure of policy stringency that incorporates both current and anticipated future compliance obligations, adjusted for firm size. This forward-looking approach helps restore the central importance of regulatory pressure in shaping emissions outcomes—an influence that some recent studies have underestimated.

Key points for decision makers

Policy stringency matters, especially when firms look ahead: Firms respond more to expected future compliance obligations than to current ones. Forward-looking regulatory pressure is essential to drive timely and effective emissions reductions.
One-size-fits-all policy may not be effective: Emissions responses vary significantly across firms—even within the same sector—based on their individual compliance gap and financial exposure. Tailored incentives or support mechanisms may enhance effectiveness.
Achieving Fit for 55 targets will require higher carbon prices. The study shows that the EU’s planned phase-out of free allowances under CBAM will help, but is not enough. A carbon price of at least €125/tCO₂e is needed to align firm-level reductions with EU 2030 climate goals.