Foreign Demand and CO2 Emissions: An Empirical Test with ... fileIntroduction I Primary concerns against incomplete environmental regulations: loss of competitiveness and carbon leakage

Foreign Demand and CO2 Emissions: AnEmpirical Test with Implications for

Regulation Leakage

Geoffrey BARROWS1 and Helene OLLIVIER2

1Ecole polytechnique, CREST, CNRS

2Paris School of Economics - CNRS

October 4, 2015

Introduction

I Primary concerns against incomplete environmentalregulations: loss of competitiveness and carbon leakage

I Empirical Evidence of the Pollution Haven Effect:

• US Clean Air Act induced US-based multinationals to increaseforeign assets and output (Hanna, 2010)

• For the average US industry, 10% of the increase in net importscomes from higher regulatory costs (Levinson & Taylor, 2008)

• Stronger evidence for PHE when trade with developingcountries and higher environmental cost industries (Cole,Elliott & Toshihiro, 2010)

I But importing more does not necessarily generate carbonleakage

Introduction

I Primary concerns against incomplete environmentalregulations: loss of competitiveness and carbon leakage

I Empirical Evidence of the Pollution Haven Effect:

• US Clean Air Act induced US-based multinationals to increaseforeign assets and output (Hanna, 2010)

• For the average US industry, 10% of the increase in net importscomes from higher regulatory costs (Levinson & Taylor, 2008)

• Stronger evidence for PHE when trade with developingcountries and higher environmental cost industries (Cole,Elliott & Toshihiro, 2010)

I But importing more does not necessarily generate carbonleakage

Existence of Carbon Leakage

Introduction

I Empirical Test of Carbon Leakage requires knowledge ofemission intensities of imports

• Carbon content of trade increased by 8% when differentialKyoto commitment (5% scale, 3% technique) (Aichele &Felbermayr, 2015)

I However, emission content of imports may not be sufficient

• Domestic sales may adjust to compensate for larger exports, ormay increase as well (Berman, Berthou, Hericourt, 2015)

• Heterogeneity in emission intensity among firms (Forslid et al,2018; Barrows & Ollivier 2018; Holladay, 2016)

• Firm emission intensities vary with trade exposure (Gutierrez &Teshima, 2018; Cherniwchan, 2017)

I Hence, we need data on production and emission intensity atthe firm level in developing countries

Introduction








Introduction








This Study

I Question: Does increased foreign demand lead manufacturingfirms in developing countries to produce more and emit moreCO2?

I Data challenges:

• Export prices are higher than domestic prices ⇒ Quantity ofoutput instead of value + Identify exporters

• CO2 emissions at the firm level ⇒ Energy-based computations

I Impacts from foreign demand shocks rather thanenvironmental regulations:

• Regulation stringency is difficult to measure

• Many ways to cope with varying energy prices

• Focus on one country: Indian manufacturers (PROWESS)

This Study

I Question: Does increased foreign demand lead manufacturingfirms in developing countries to produce more and emit moreCO2?

I Data challenges:

• Export prices are higher than domestic prices ⇒ Quantity ofoutput instead of value + Identify exporters

• CO2 emissions at the firm level ⇒ Energy-based computations

I Impacts from foreign demand shocks rather thanenvironmental regulations:

• Regulation stringency is difficult to measure

• Many ways to cope with varying energy prices

• Focus on one country: Indian manufacturers (PROWESS)

Preview of the Results

I A 10% increase in Foreign Demand lead exporting Indianfirms to

• increase their export value by 1.85% and their domestic valueby 0.46%

• increase their CO2 emissions by 0.5%

• increase their total output by 0.7%

• reduce their emission intensity by 0.2%

• through product mix adjustments• not technological change

Data

I Panel of 3,200 large Indian manufacturers 1990-2011,PROWESS

• Output quantity and value by product

• Total energy consumption by energy source (e.g., coal,electricity, diesel, etc)

• Energy intensity of production by energy source (e.g., coal,electricity, diesel, etc) and product. law

• Export share

I UN COMTRADE (BACI) aggregates trade flows by HS6product 1995-2011

Descriptive Statistics: Two Panels

Firm-Level Data Product-Level Data

Average Values Average Values

#Firms Sales Exp Sh #Prod #Firms Sales #ProdIndustry (1) (2) (3) (4) (5) (6) (7)

Food & bev. 268 0.78 10.0 2.36 200 0.90 1.63Textiles 686 0.50 11.7 1.56 620 0.55 1.45Wood & Paper 201 0.64 1.7 1.30 155 0.72 1.30Chemicals 621 0.67 14.2 2.49 340 0.55 2.15Plastics & Rub. 210 0.70 9.3 1.73 122 0.57 1.60Minerals 182 1.11 4.5 1.33 148 1.51 1.43Base Metals 719 0.85 4.9 1.96 418 1.15 1.54Machinery 207 0.74 12.2 2.19 72 0.50 1.28Transport eq. 123 1.01 10.4 2.06 48 2.62 1.40

Total 3217 0.73 9.3 1.94 2123 0.83 1.59

Descriptive StatisticsExporters Non-exporters Difference

Mean Sd Mean SdPanel A : Firm-Level Data

Sales Value Total (bill of rs) 1.096 ( 2.042 ) 0.401 ( 0.810 ) 0.695 ***Sales Value Domestic (bill of rs) 0.962 ( 1.961 ) 0.401 ( 0.810 ) 0.560 ***Sales Value Exports (bill of rs) 0.135 ( 0.284 ) - -Production (various units) 123.7 ( 1184 ) 25.8 ( 434.6 ) -Emissions (kt CO2) 56.00 ( 218.7 ) 34.1 ( 149.1 ) 21.95 ***E/V (t/mill rs) 59.53 ( 473.9 ) 108.3 ( 538.4 ) -48.78 ***E/Q (t/unit) 341.3 ( 980.8 ) 209.2 ( 718.7 ) -# Products 2.116 ( 1.757 ) 1.733 ( 1.190 ) 0.383 ***Thiel Index 0.955 ( 2.094 ) 0.734 ( 1.505 ) 0.221 ***Elec Price (rs/kwh) 3.934 ( 0.890 ) 4.011 ( 0.883 ) -0.077 ***Coal Price (rs/kt) 0.009 ( 0.089 ) 0.008 ( 0.017 ) 0.000Diesel Price (rs/Mls) 0.041 ( 0.152 ) 0.052 ( 0.476 ) -0.011 **Log Foreign Demand 9.963 ( 1.741 ) 9.785 ( 1.830 ) 0.178 ***Log Foreign Demand, US/CAN 10.76 ( 2.089 ) 10.903 ( 2.091 ) -0.139 ***Log Foreign Demand, EU 10.17 ( 1.760 ) 10.184 ( 1.716 ) -0.017Log Foreign Demand, Other 9.133 ( 1.652 ) 9.124 ( 1.750 ) 0.009

# Firms 1759 1458# Firms Years 13698 7154

Panel B : Product-Level Data

Sales Value Total (bill of rs) 1.445 ( 5.398 ) 0.397 ( 0.831 ) 1.049 *Production (various units) 12.10 ( 58.92 ) 6.676 ( 45.80 ) -Emissions (kt CO2) 97.19 ( 387.9 ) 38.52 ( 204.4 ) 58.67E/Q (t/unit) 221.2 ( 335.6 ) 153.6 ( 223.0 ) -E/V (t/mill rs) 772.2 ( 16706 ) 2638 ( 124974 ) -1866.2 ***

# Firms 1328 795# Firms-products 2380 985# Firms-product Years 20304 4876

Empirical Strategy

I We consider trade shocks that are exogenous to individualfirms

• When computing these trade shocks, we use the set ofproducts and their respective share of total sales for the firstyear of the firm in our sample, and exclude this year

I Given theoretical models (Mayer, Melitz & Ottaviano, 2018;Barrows & Ollivier, 2018), an increase in Foreign Demandshocks implies

• Larger market access

• Increase in competition for exporters to these destinations

Demand Shocks

I Formally, we define total import demand for a destination d inproduct j in time t as

Ddjt =∑o∈∆o

Dodjt

I Aggregate across destinations with base-year shares

FD jt =∑d∈∆d

xdj0Ddjt

xdj0 ≡Xdj0∑

d∈∆dXdj0

share of Indian exports in base year t = 0

I Break out demand shocks by destination: US/Canada, EU,others

Demand Shocks

881

010

020

030

040

050

060

070

080

0

Fore

ign

Dem

and

1995 2000 2005 2010Year

A: BACI 1180

1193

1271

1293

903

1203

1543

0

100

200

300

400

500

600

700

800

Fore

ign

Dem

and

1995 2000 2005 2010Year

B: Prowess Codes

Food Textiles Wood, PaperChemicals Plastics NonmetallicBase Metals Machinery Transport

Demand Shocks

0.2

.4.6

.81

Cumu

lative

Dist

ributi

on

-1 0 1 2Year-over-Year Percentage Growth

0.5

11.5

Dens

ity

-2 -1 0 1 2Residual Log Foreign Demand

kernel = epanechnikov, bandwidth = 0.0327

Firm-Specific Demand Shocks

I Merging to PROWESS

• CMIE classifies products by own code

• We generate our own mapping by hand between Prowess codesand HS6 rev 1996

I We aggregate foreign demand shocks at the firm level usingbase-year product weights

FD it =∑j∈∆j

xij0FD jt

xij0 ≡Xij0∑

j∈∆jXij0

share of output j in firm i ’s total sales in base

year t = 0

Impacts of Foreign Demand Shocks

I Firm i ’s Response to Foreign Demand Shocks:

Xit = αi + αt + βLog FD it + γWit + εit

• X is Log Export or Domestic Value, Export Share, CO2, Totaloutput, or Emission intensity in quantity

• Controls include firm-specific prices of energy andsector-specific linear time trends

• Standard errors are clustered at the main product category

I Heterogeneity

• Exporters vs Non-Exporters

• Multi-product firms vs Single-Product firms

Export and Domestic Values, All firms

Exporters Non-Exporters

Dep Var: Log(Exp. Val) Export Share Log(Dom. Val) Log(Dom. Val)(1) (2) (3) (4)

Log FD it 0.185∗∗∗ 0.731∗ 0.046∗∗∗ 0.007(0.045) (0.391) (0.014) (0.022)

R squared 0.785 0.878 0.960 0.950mdv 0.342 14.986 2.096 1.443# Obs 5650 8408 8408 3350# Firms 958 1203 1203 664

Export and Domestic Values by Destination, All firms

Dep Var: Log(Export Value) Log(Domestic Value)

(1) (2) (3) (4) (5) (6)

Log FDUS/CANit 0.140∗∗∗ 0.024∗

(0.035) (0.014)

Log FDEUit 0.073∗∗ 0.014

(0.030) (0.011)

Log FDOtherit 0.137∗∗∗ 0.030∗∗∗

(0.030) (0.010)

R squared 0.789 0.788 0.784 0.956 0.956 0.957mdv 0.348 0.354 0.342 1.889 1.891 1.910# Obs 5482 5529 5644 11255 11331 11748# Firms 937 948 958 1825 1839 1867

Implications for Carbon Leakage

I Exogenous variations in foreign demand are positivelyassociated with both foreign and domestic sales

I Hence, assuming exogenous emission intensity, looking only attrade flows will under-estimate carbon leakage

Impacts of Foreign Demand Shocks on Production, CO2emissions, and Emission Intensity - All Firms


Log(CO2) Log(Q) Log(CO2Q

) Log(CO2) Log(Q) Log(CO2Q

)

(1) (2) (3) (4) (5) (6)

Log FD it 0.049∗∗∗ 0.068∗∗∗ -0.019∗ -0.003 -0.003 0.001(0.015) (0.019) (0.011) (0.018) (0.022) (0.022)

R squared 0.998 0.998 0.983 0.997 0.997 0.972mdv 9.105 10.065 -0.961 8.619 9.697 -1.078# Obs 8408 8408 8408 3350 3350 3350# Firms 1203 1203 1203 664 664 664

Impacts of Foreign Demand Shocks on Production, CO2emissions, and Emission Intensity - Multi-Product Firms




)

(1) (2) (3) (4) (5) (6)

Log FD it 0.029 0.054∗∗ -0.025∗∗ -0.002 0.000 -0.002(0.018) (0.022) (0.012) (0.025) (0.022) (0.018)


Impacts of Foreign Demand Shocks on Production, CO2emissions, and Emission Intensity - Single-Product Firms




)

(1) (2) (3) (4) (5) (6)

Log FD it 0.149∗∗∗ 0.120∗∗∗ 0.029 -0.028 -0.045 0.017(0.047) (0.035) (0.028) (0.043) (0.048) (0.049)


Did CO2 Emissions Increase with Positive Foreign DemandShocks?

I Considering the population of firms that export

• Yes, CO2 emissions increased by 0.05%• However, production (in quantity) increased more (0.07%)• Emission intensity decline explains the discrepancy (0.02%)

I Considering Multi-Product firms

• Same results as above, except that rise in CO2 is no longersignificantly different from 0

I Considering Single-Product firms

• CO2 emissions and output increased similarly: no techniqueeffect

Implications for Carbon Leakage

I Total output increased more than total CO2 emissions

I Because emission intensity declined

I Hence, assuming exogenous emission intensity over-estimatecarbon leakage

How Did Firm Emission Intensity Decline?

I Product Mix

• Higher competition in the export market should skew exportstoward best performing products

• Best performing products are also cleaner in Prowess (Barrows& Ollivier, 2018)

I Technological Change

• Firms facing higher competition can invest in newvariable-cost-reducing technologies

• Are these technologies more or less emission intensive?

Best Performing Products are Cleaner

01

23

δ

2 3 4 5 6 7+Product Output Rank Within the Firm

All Data Tonnes Only

A: CO2

Product Mix


Thiel # Products Thiel # Products(1) (2) (3) (4)

Panel A

Log FD it 0.049 0.066 0.040 0.006(0.056) (0.062) (0.044) (0.034)


Panel B

Log FDUS/CANit 0.111∗∗∗ 0.128∗∗∗ 0.043 0.006

(0.024) (0.018) (0.037) (0.033)


Technological Change at the Firm-Product Level




)

(1) (2) (3) (4) (5) (6)

Log FD jt 0.025∗∗∗ 0.023∗∗ 0.002 0.012 0.005 0.007(0.007) (0.010) (0.007) (0.023) (0.016) (0.013)

R squared 0.997 0.998 0.998 0.996 0.997 0.998mdv 9.331 9.998 6.241 8.532 9.429 6.011# Obs 13004 13004 13004 2683 2683 2683# F-Prod 1651 1651 1651 525 525 525# Firms 1062 1062 1062 456 456 456

Channels through which Firm Emission Intensity Declined

I Product Mix

• Stronger concentration toward cleaner core products ⇒Decline

• Adding new products ⇒ Increase

I Technological Change

• No evidence since CO2 and output increase similarly at thefirm-product level

Robustness Checks

I Rather than looking at year-to-year variations in demandshocks, evaluate the impacts of long difference changes inforeign demand

• Compare 2008-2011 period to 1995-1998 period

robust

I Testing for pre-period trends

• Regress changes in pre-period (comparing 1994-1995 to1989-1992) on long difference demand shocks (2008-2011relative to 1995-1998) used in the analysis

I Aggregated impacts at the product category level (acrossfirms) using the firm-product panel

Summary of Implications for Carbon Leakage

I Trade flows 6= Output

• Domestic sales increase with foreign sales• Looking only at trade flows under-estimate carbon leakage

I Exporters are Cleaner than Non-Exporters

• Average country-level emission intensities over-estimatecarbon leakage

I Emission Intensity Declines with Trade Exposure

• Exogenous emission intensities over-estimate carbon leakage

Link to Regulations

Log(FD) Log(Exports) Log(EP)

(1) (2) (3) (4) (5) (6)

Log EP jt 0.235∗∗∗ 0.031∗∗

(0.019) (0.013)

Log Kyoto jt -0.403∗∗∗ 0.021 -0.496∗∗∗

(0.082) (0.051) (0.078)

Log FD jt 0.277∗∗∗

(0.007)

R squared 0.755 0.746 0.805 0.806 0.850 0.745mdv 8.824 8.832 7.522 7.338 7.581 3.138# Obs 51817 75357 53975 80487 75357 55189# HS6 3308 4892 3347 4977 4892 3354

Partial Equilibrium Quantification

I Consider 5% higher trade flows (Aichele & Felbermayr 2015)

I ASI: 8% total sales from exports, 30% total sales by exporters

I PROWESS: Average E/V 76t/M Rs, for Exporters 60t/M Rs

I Computations

• A&F: constant E/V ⇒ 4.5 million t CO2 (4.6 if 3% dirtier)

• Us: 1.3% increase in CO2 from exporters’ sales ⇒ 3.5 Mt CO2

Discussion

I When evaluating carbon leakage, it is important to considernot only firms in the country that imposes more stringentenvironmental regulation, but also exporting firms in thedeveloping countries

• Domestic sales can respond to increases in exports

• Firm emission intensity can respond to trade exposure

I Also, researchers should be careful when interpreting firmemission intensity changes as technological change: it may allbe due to product mix!

Thank you

Contact: [email protected]

Supplemental Material

Companies Act

Sample Report

Back to jump1

Robustness: Long Differences

Dep Var: ∆Exp sh ∆Log CO2 ∆Log Q ∆Log (E/Q)(1) (2) (3) (4)

Panel A: Firm Level

∆Log FD0811−9598 1.028∗∗ 0.054∗ 0.188∗∗∗ -0.134∗∗

(0.424) (0.029) (0.071) (0.062)

R squared 0.03 0.05 0.01 0.01# Firms 793 793 793 793

Panel B: Firm-Product Level

∆Log FD0811−9598 0.082∗∗ 0.097∗∗∗ -0.015(0.036) (0.032) (0.018)

R squared 0.02 0.04 0.01# Firm-Products 481 481 481

Robustness: Testing for Pre-Period Trends

Dep Var: ∆Exp sh ∆Log CO2 ∆Log Q ∆Log (E/Q)∆= 9495-8992 (1) (2) (3) (4)

Panel A: Firm Level

∆Log FD0811−9598 0.078 0.010 0.046 -0.037(0.312) (0.022) (0.052) (0.054)

R squared 0.01 0.03 0.02 0.00# Firms 367 367 367 367

Panel B: Firm-Product Level

∆Log FD0811−9598 0.022 0.029 -0.006(0.023) (0.020) (0.014)

R squared 0.04 0.02 0.01# Firm-Products 227 227 227

Aggregated Impacts Within Product Categories

Dep Var: Log Q Log CO2 Log (E/Q) # Firm-Products # Firms(1) (2) (3) (4) (5)

Log FD jt 0.049∗∗∗ 0.044∗∗ -0.005 0.075 0.078∗

(0.017) (0.019) (0.013) (0.045) (0.047)

R squared 0.89 0.87 0.87 0.97 0.97# Obs 5133 5133 5133 5133 5133# Products 499 499 499 499 499

Back to jump2

Results by Industry

Log(Exp V) Log(Dom V) Log(CO2) Log(Q) Log(CO2Q

)

Industry (1) (2) (3) (4) (5)

Food prod, bev. 1.16 *** 0.01 0.15 ** 0.24 * -0.09Textiles 0.10 0.04 0.01 -0.01 0.02Wood & paper -0.37 -0.21 0.00 -0.09 0.09Chemicals 0.14 0.03 0.05 * 0.06 *** -0.01Plastics & rub. 0.07 0.07 0.09 0.04 0.05Minerals 0.27 0.06 0.02 0.09 * -0.07 *Base metals -0.02 0.05 0.03 0.05 -0.01Machinery 0.54 *** 0.23 ** 0.27 *** 0.35 *** -0.08Transport eq. -1.64 *** -0.43 *** -0.29 -0.25 -0.04

Documents

Foreign Demand and CO2 Emissions: An Empirical Test with ... fileIntroduction I Primary concerns against incomplete environmental regulations: loss of competitiveness and carbon leakage