Climate policy & corporate performance: new results from panel data

1. Climate policy & corporate performance: new results from panel data Nicola Commins, Seán Lyons &Marc Schiffbauer, ESRI 27 August 2009

2. Contents • Introduction • Alternative theories • Previous research • Methodology • Data • Results • Conclusions

3. Introduction • What effects are climate policy measures likely to have on firm performance? • Particularly interested in the impact of energy taxes on Total Factor Productivity (TFP) • Use firm-level panel data from EU countries (Amadeus database) to examine company productivity, profitability, investment and employment in response to climate/energy policy

4. Alternative theories • Increased compliance costs and constraints on production possibilities • Pollution haven hypothesis • Porter hypothesis • Factor endowment effects

5. Previous research • Environmental regulation & firm behaviour • Leiter et al. (2009):Environmental stringency has positive but diminishing impact on investment (industry level, European sample) • Veith et al. (2008): Returns on common stock in power generation sector are positively correlated with rising prices for emissions rights – ETS increases profits • COMETR WP3 (2007): analysis of 8 sectors in 7 European countries show a slightly negative effect of energy taxes on competitiveness and output • Henderson & Millimet (2005): Insignificant effect of environmental stringency on state-level output for USA • Koetse (2008): Energy and capital are close substitutes, while energy and labour are not; a carbon tax would thus make production more labour-intensive; however, a fall in production may more than offset this • Relatively little research using firm-level microdata Anger & Oberndorfer (2008) find an insignificant effect of relative allocation of emission allowances on German firm revenue in 2005

6. Methodology • Panel data models with controls for year, country and sector level effects • Also tax-sector interactions • Estimated in first differences to remove autocorrelation • Impact of energy taxes and ETS on: • Productivity • Investment • Employment • Price-cost margin • TFP = f(Energy Tax + Tax*Sector + ETS + Education (by country) + Import Intensity (by sector) + Output Gap (by country) + Year + Country + Sector)

7. Data • Amadeus database: firm level panel data, 1996 to 2007 • Dependent variables: • TFP (estimated using Olley & Pakes method (1996) • Investment (change in tangible fixed assets minus depreciation) • Employment • Price-cost margin (proxy=value added/turnover) • Independent Variables: • Energy Taxes (Eurostat environmental accounts) • ETS dummy variable • Education (OECD, share of pop. with tertiary qual.) • Import Intensity (OECD, sectoral) • Output Gap (OECD, national)

8. Results • ETS associated with 11% higher rate of investment • ETS effects on price-cost margin n.s. • ETS associated with 11% decrease in employment – Consistent with pollution haven hypothesis • For TFP, output gap, education, import intensity and ETS n.s. • Tax effects vary widely by sector (as taxes are different, and energy-intensities are very different)

9. Tax effects: TFP

10. Tax effects: Investment

11. Tax effects: Employment

12. Tax effects: Price-Cost Margin

13. Conclusions • Energy taxes have had a larger effect than the ETS (no surprise) • Differences between sectors (no surprise) • Profits hardly affected • TFP growth down, in contrast to Porter hypothesis • Employment down, in contrast to Green Jobs hype • Investment up, in contrast to pollution haven hypothesis