Carbon costs and industrial firm performance: Evidence from international microdata

A central concern in climate policy making is that increasing carbon costs unilaterally would harm economic activity and competitiveness. This paper empirically evaluates this concern by providing first international firm-level evidence on the joint performance effects of climate policies. Shadow prices of fossil energy sources serve as an integral and internationally comparable measure of carbon costs. This measure captures both explicit and implicit carbon costs arising from diverse policy mixes and interactions, providing new insights into climate policy effects. We assess the impact of carbon costs using fixed effects instrumental variable estimation on up to 3.1 million firms from 32 countries and 15 competitiveness-prone industrial sectors from 2000 to 2019. Carbon costs hardly hurt most industrial firms and seemed to have predominantly triggered adaptation rather than relocation responses. Economically modest employment reductions were concentrated in capital-intensive firms and small firms in emissions-intensive, trade-exposed sectors, particularly in the EU. In these sectors, large and capital-intensive firms ramped up domestic investments in response to carbon cost increases, and small firms improved productivity. Profitability and exit probabilities were hardly affected throughout all subgroups of firms.