This paper investigates the causal effect of the European Emissions
Trading Scheme (EU ETS) on firms' investments mitigating pollution,
using firm-level panel data on French manufacturing sectors from 2001
to 2016. This paper shows that the EU ETS entailed an increase of
low-carbon investments in the third phase, suggesting that the EU
ETS finally brings regulated firms towards a cleaner production path
and is thus dynamically efficient. In addition, the EU ETS led to
a decrease in investments dedicated to pollution not related to greenhouse
gases, such as sewage or waste, indicating that EU ETS firms favor
investments that mitigate air pollution compared to other environmental
damages.