European Climate Policy and Industrial Relocation: Evidence from German Multinational Firms
42 Pages Posted: 14 Nov 2016
Date Written: October 28, 2016
This study exploits the installation-level inclusion criteria of the European Union Emissions Trading System (EU ETS) to investigate the policy’s causal effect on outbound foreign direct investment (FDI) decisions of German multinational firms. Difference-in-differences with bias-corrected matching estimators yield robust evidence that broadly disputes the credibility of the widespread threat of industrial relocation through FDI by EU ETS regulated firms. Specifically, our baseline specification indicates that the treatment effect falls in the interval [-0.2%, 0.9%] and is unambiguously insignificant. However, further analyses point to considerable within-treatment variations in the relocation choice among regulated multinational firms. While the large majority of firms is unresponsive, a comparatively small number of firms have significantly increased their FDI activity outside the EU compared to a counterfactual scenario. Paradoxically, relocating firms neither operate in the targeted energy-intensive sectors, nor are they emission-intensive. They are rather firms with permit shortage operating in those sectors (in particular, machinery) that are supposed to be less capital-intensive and, thus, more geographically mobile. The finding that these footloose firms only account for a small share of total regulated emissions indicates that the potential for policy-induced leakage of emissions may be reasonably limited.
Keywords: Environmental Regulations, EU ETS, FDI, Industrial Relocation, Carbon Leakage, Policy Evaluation
JEL Classification: F23, H23, Q54, Q58, C21
Suggested Citation: Suggested Citation