European Climate Policy and Industrial Relocation: Evidence from German Multinational Firms

42 Pages Posted: 14 Nov 2016

See all articles by Nicolas Koch

Nicolas Koch

Mercator Research Institute on Global Commons and Climate Change (MCC); University of Hamburg

Houdou Basse Mama

ESCP Europe

Date Written: October 28, 2016

Abstract

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

Koch, Nicolas and Basse Mama, Houdou, European Climate Policy and Industrial Relocation: Evidence from German Multinational Firms (October 28, 2016). Available at SSRN: https://ssrn.com/abstract=2868283 or http://dx.doi.org/10.2139/ssrn.2868283

Nicolas Koch (Contact Author)

Mercator Research Institute on Global Commons and Climate Change (MCC) ( email )

Torgauer Straße 12-15
Berlin, 10829
Germany

University of Hamburg ( email )

Von-Melle-Park 9
Hamburg, 20146
Germany

Houdou Basse Mama

ESCP Europe ( email )

Heubnerweg 8-10
Berlin, 14059
Germany

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