Measuring Carbon Responsibility: A Policy‐Anchored Simulation Under the EU Emissions Trading System

ABSTRACT

This paper introduces carbon responsibility ( CR ) as a policy‐anchored measure of firms' effective carbon liability under the EU Emissions Trading System ( EU ETS ). CR is simulated by combining sector‐specific allocation rules with prevailing carbon prices and scaling the resulting liability by market value, thereby capturing firms' exposure to priced carbon relative to size. Using panel data on 682 European firms from 2013 to 2024, we examine the relationship between CR and carbon performance ( CP ), defined as revenue per ton of emissions. Results show a robust negative association: firms with higher CR tend to exhibit lower CP , consistent with transitional compliance costs reducing near‐term efficiency. The strength of this relationship depends on governance and institutional conditions. Performance‐oriented pay amplifies the adverse CR ‐ CP link, while third‐party verification further tightens accountability pressures. By contrast, state ownership mitigates adverse effects, reflecting institutional support and longer planning horizons. Internal carbon pricing shows limited firm‐level impact but serves as a stronger disciplining mechanism when adopted broadly across industries. These findings highlight the conditional nature of regulatory accountability, advance the literature by integrating governance and assurance moderators into the carbon‐pricing–performance nexus, and offer practical guidance for firms, regulators, and policymakers seeking to align carbon market design with corporate responses.