Research

Unilateral Environmental Policy and Offshoring

with P.M. Richter and F. Naumann

CESifo Working Paper No. 11096, 2024

This paper analyzes how offshoring shapes the effectiveness of unilateral environmental policies, with a particular focus on its role in driving emissions leakage and influencing global emissions, income, and inequality. By combining standard modeling approaches, we offer new insights into the environmental and economic outcomes of unilateral policies in an open economy, emphasizing the importance of firm heterogeneity.

In our framework, heterogeneous firms allocate labor between production tasks and emissions abatement, with only the most productive firms offshoring to reduce costs. We find that global emissions respond non-monotonically to a unilateral emission tax increase: they decrease when initial tax differences are small but increase — resulting in leakage rates exceeding 100% — when differences are large.

This counterintuitive outcome is driven by a global technique effect, where the cleanest firms relocate production and incumbent offshorers increase emissions due to a weakening foreign effective emissions tax in general equilibrium. Implementing a border carbon adjustment prevents emissions leakage, reduces domestic income inequality but exacerbates inequality between countries.

Under revision for the Journal of International Economics

General Oligopolistic Equilibrium: Strategic Firm Behaviour and Environmental Policy

Single authorship

This paper employs a GOLE model à la Nearay and Tharakan (2012) to analyze the impact of a unilateral environmental policy reform on emission leakage, accounting for trade dynamics, oligopolistic competition, and capital-intensive abatement.

The model builds on a mechanism by Kreps and Scheinkman (1983): Firms decide on abatement investments in a first stage, affecting their production cost structure, emission-intensity, and competition mode (Bertrand or Cournot) in a second stage.

As I find, raising the emission tax in one country internationally increases the share of sectors investing in abatement efforts. This significantly reduces emissions in both the reforming and the non-reforming country. The calibrated simulation reveals a negative leakage rate of around 80%, indicating substantial cross-border emission reductions.

The emission reduction is primarily driven by the extensive margin, i.e., sectors initiating to invest in abatement as a response to the reform. On the other hand, my results highlight an increased oligopolization of the economy as an undesirable side effect. Hence, the clean-up comes at the cost of competitiveness.

Welfare-optimal policy response to border carbon adjustments: An emerging economy perspective

with J. Gallé

This paper presents a Melitz-style model of asymmetric countries to identify the optimal environmental policy response to a Border Carbon Adjustment (BCA) from an emerging economy perspective. We calibrate the model with detailed Indian firm data on emissions, productivity, and exports.

In a quantitative simulation, we show that the presence of a BCA strongly reduces the welfare costs of raising India's emission tax to the level of that of the EU. Further analysis shows that there are substantial differences in the distribution of welfare costs across sectors.

Finally, we show that this welfare smoothing effect is decreasing in productivity and thereby limits the incentive to raise domestic carbon prices in the least developed countries.

Exporting, Importing and Firm-Level Emission Intensity: The Case of India

with S. Kar

Using firm-level data from India on energy inputs and financial performance from 1993 to 2013, we analyze the role of importing foreign intermediates on CO2 intensities of around 4,000 Indian companies in seven manufacturing sectors.

For this nexus, we provide one of the first contributions featuring the setting of an emerging economy. Focusing on the extensive margin, we conduct a difference-in-differences event study with the firm's first year of importing as staggered treatment.

We find that the decision to start importing is associated with a decline in firm-level CO2 intensity of around 6% one and two years after the treatment. In the context of India as a 'pollution haven,' this rather suggests a positive effect of imports on productivity and technological upgrading.

In comparison, the firm's decision to start exporting induces stronger reductions (-10%) in CO2 per sales volumes, retaining significance across several years after the treatment period. The estimation results also hint at the presence of firm-level anticipation effects prior to the treatment for both exporting and importing.