This paper studies the effect of the EU ETS on carbon leakage focusing on cross-country investments. Using detailed firm-level data, a model of the firms’ production and investment decisions is presented that allows to estimate how the probability of locating productive capacity in a country responds to the price of carbon in that country. Specifically, firms that employ a more energy intensive technology, or that cannot easily switch to less polluting fuels, emit more and thus need to buy more pollution rights. Therefore, such firms are more likely to locate their investments outside of the EU ETS, everything else equal.