The paper discusses impacts of the EU emissions trading system (EU ETS) on the major carbon-emitting industry in Europe, the heat and power generation industry. This industry has been allocated around 2/3 of total allowances under the system. We investigate shifts in climate strategies for the major companies in the industry before and after the introduction of and revisions to the ETS. We seek out causal links between company strategies and factors at the company- sector-, and national levels. Through this procedure, the paper discusses whether and under what conditions the EU ETS appears to produce innovative or defensive strategic response by the European power industry. The analytical framework is inspired by hypotheses set forth in the strategy literature: the Porter-hypothesis expecting innovative strategic response from new strict environmental policy regulation and the alternative industrial economics-inspired hypothesis expecting defensive short-term cost-minimization.
