This project is aimed at understanding how firms react to binding climate regulation. A significant tightening of climate regulation in the EU ETS in 2017 led to a steep increase in the price of emission allowances. Firms that are highly exposed to the regulation have likely responded differently than low-exposed firms in several ways. First of all, the cost pass-through by regulated firms of emission prices to end-users will be analysed with a special focus on Belgium. Secondly, the effect of tighter regulation on firms' financial constraints (in our case, debt structure) and consequently innovation will be examined. Finally, the research will empirically examine the interaction between the EU ETS and national climate policies and its effect on emission efficiency of regulated firms. This research will exploit firm heterogeneity to understand the difference of within ETS firm behaviour using firm-level balance sheet data and plant-level emission data. The findings can inform policy makers about the effectiveness of EU ETS on different firms, sectors and countries by enhancing the understanding of unintended side-effects. Such insights can support decisionmakers in improving the EU ETS costeffectiveness, which is essential for achieving the 2030 goal of 55% reduction in greenhouse gas emissions (compared to 1990 levels) and the and 2050 goal of carbon neutrality, respectively.