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

2 Contents n n Introduction n n Alternative theories n n Previous research n n Methodology n n Data n n Results n n Conclusions

3 Introduction n n What effects are climate policy measures likely to have on firm performance? n n Particularly interested in the impact of energy taxes on Total Factor Productivity (TFP) n n 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 n n Increased compliance costs and constraints on production possibilities n n Pollution haven hypothesis n n Porter hypothesis n n Factor endowment effects

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

7 Data n n Amadeus database: firm level panel data, 1996 to 2007 n n 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 n n ETS associated with 11% higher rate of investment n n ETS effects on price-cost margin n.s. n n ETS associated with 11% decrease in employment – Consistent with pollution haven hypothesis n n For TFP, output gap, education, import intensity and ETS n.s. n n 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 n n Energy taxes have had a larger effect than the ETS (no surprise) n n Differences between sectors (no surprise) n n Profits hardly affected n n TFP growth down, in contrast to Porter hypothesis n n Employment down, in contrast to Green Jobs hype n n Investment up, in contrast to pollution haven hypothesis