Energy Tax Exemptions and Industrial Production

This paper investigates the impact of a large electricity tax exemption on production levels, employment and input choices in the German manufacturing industry. For two policy designs, we show that exempted plants increase their electricity use. This effect is larger under a notched exemption policy, where passing an eligibility threshold yields infra-marginal benefits, compared to a policy without such benefits. We detect no significant impact of the exemptions on production levels, export shares and employment. Using counterfactual simulations, we document that notched policies substantially distort firms’ production input choices when financial stakes are high and compliance costs are low.