Working Paper: CEPR ID: DP8583
Authors: Rikard Forslid; Toshihiro Okubo; Karenhelene Ulltveit-Moe
Abstract: This paper develops a theoretical model of trade and environmental emissions with heterogeneous firms, where firms make abatement investments and thereby affect their level of emissions. We show that investments in abatement are positively related to firm productivity and firm exports, while emission intensity is negatively related to firms' productivity and exports. The basic reason for these results is that a larger production scale supports more investments in abatement and, in turn, reduces emissions per output. We find that trade liberalization weeds out the least productive and dirtiest firms thereby shifting production away from relatively dirty low productive local firms to more productive and cleaner exporters. The overall effect of trade is therefore to reduce emissions. We test the empirical implications of the model on emission intensity, abatement and exporting using firm-level data from Sweden. The empirical results support our model.
Keywords: heterogeneous firms; environmental emissions; abatement; international trade
JEL Codes: D21; F12; F15; Q56
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Investments in abatement (Q52) | Firm productivity (D21) |
| Investments in abatement (Q52) | Export status (Y10) |
| Emission intensity (L94) | Firm productivity (D21) |
| Emission intensity (L94) | Export status (Y10) |
| Trade liberalization (F13) | Exit of least productive firms (D21) |
| Exit of least productive firms (D21) | Shift to more productive firms (D21) |
| Shift to more productive firms (D21) | Decrease in total emissions (Q52) |
| Trade liberalization (F13) | Decrease in total emissions (Q52) |
| Exporters (F10) | Lower emission intensities than non-exporters (F64) |
| Trade liberalization (F13) | Increase in competition (L13) |
| Increase in competition (L13) | Downsizing of non-exporters (F69) |
| Downsizing of non-exporters (F69) | Reduction in abatement investments (G31) |
| Higher foreign sales (F23) | Increase in abatement investments by exporters (Q52) |
| Total emissions from exporters (F10) | Overall effect of trade liberalization (F69) |