EU ETS phase IV and Industrial performance

•This article analyzes the impact of the EU ETS Phase IV announcement on the performance of the regulated sectors.•Using data from 347 sectors located within the OECD over the period 1995–2019, we observe that regulated sectors have reacted in line with Porter's hypothesis.•Specifically, we show that regulated sectors reacted immediately after the announcement by gradually increasing their R&D spending.•This increase in investment makes it possible to substitute labor with more environmentally-friendly capital, thereby improving production and competitiveness in regulated sectors. This article studies the reaction of sectors regulated by the European Emissions Trading Scheme (EU ETS) to the announcement of Phase IV. Using a Difference-in-Differences approach and data from 347 sectors located within the OECD over the period 1995–2019, we show that regulated sectors reacted immediately after the announcement by gradually increasing their R&D spending. Furthermore, these increases in investment boosted the competitiveness of firms in the regulated sectors through higher output, despite a reduction in total employment. Consequently, our results show that the EU ETS leads to a progressive substitution of labor by more productive capital. Overall, we provide evidence on firms' responses to Phase IV of the EU ETS.