By Marc Baudry and Anouk Faure.
This study investigates the nature of technological progress in six manufacturing industries covered under the EU-ETS, plus the power sector, and its effect on carbon price formation using marginal abatement cost curves. We adopt a technological frontier framework, which we calibrate to input and output data at the plant level from 2013 to 2017, with a directional distance function approach. Our results reveal that most of the time, technological progress resulted in inflating baseline emissions, despite decreasing the carbon intensity of production. In our sample industries, technological progress therefore leads to increase abatement efforts, raising the equilibrium price of carbon.