The impact of environmental policies on business performance is a longstanding and controversial topic. Evidence to inform the policy debate on the possible trade-offs between economic and environmental goals is thus much needed. The authors of this paper contribute to this debate by evaluating the responses of French manufacturing firms to large increases in energy prices, which the authors use as a proxy for stringent environmental policy. They evaluate the influence of energy prices on socioeconomic and environmental performance for the period 1997–2015.

In the data the authors use, energy prices exhibit a historical increase of approximately 50 per cent. This means the authors’ policy evaluation closely resembles what would happen in an ambitious carbon pricing scenario, such as that enacted by the French government with the Energy Transition Law of 2015 and those planned by all countries that have ratified the Paris Agreement on climate change.

To identify the effects of increasing energy prices, the authors construct an instrument that isolates the exogenous determinants of establishment energy prices, such as shocks to world oil prices, from the endogenous ones, such as quantity-discounts for large consumers. The results highlight trade-offs between environmental and socioeconomic goals: increases in energy prices substantially reduce energy consumption and carbon dioxide emissions, and modestly reduce employment and productivity. These trade-offs become starker when the authors simulate the impact of the planned French carbon tax, in the long term and for energy-intensive sectors. The impacts of energy prices are larger in the long than in the short term, in trade-exposed and in energy-intensive sectors, and slightly favour technical workers.

The microeconomic effect estimated in this study may differ from the macroeconomic impact of energy prices. Indeed, energy prices can affect entry and exit of establishments as well as the reallocation of inputs across establishments. The results provide a preliminary assessment of these compositional effects, showing that they tend to offset each other.

Key points for decision-makers

  • To identify the effects of increasing energy prices, the authors isolate the exogenous variation in establishment-specific energy prices, combining information on the initial energy mix of the company with national-level price changes of different energy sources.
  • The authors find that a 10% increase in establishment-level energy prices brings a 5% reduction in energy consumption and an 11% reduction in carbon dioxide emissions (although the latter might reflect the characteristics of the French energy system).
  • A 10% increase in prices has a modest negative impact on employment (-0.8%) and an even smaller effect on wages (-0.09% but not significant).
  • The negative effects on employment do not disproportionately harm the least skilled workers and in fact tend to benefit middle-skill technical workers.
  • The authors show that employment effects are mitigated by reallocating workers to different establishments within the same firm, but are amplified by the effect of energy prices on establishment’s closure.

Read Marin and Vona’s commentary on their work here. 

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