How Will Climate Change Policies Affect Domestic Manufacturing?

The pollution haven hypothesis suggests that unilateral environmental regulation could cause adverse “competitiveness” impacts on domestic manufacturers as they lose market share to foreign competitors and relocate production activity – and emissions – to unregulated economies. This is particularly troubling in the case of mitigating climate change, a global pollution externality, where there are no localized environmental benefits and shifting emissions to unregulated economies undermines the domestic policy rationale. Simulations have suggested this effect might shift between 5 to 20 percent of regulated emission reductions to unregulated economies. We instead use an empirical framework to examine this question, taking advantage of a state-byindustry panel employment and price data over 1990-2009. We implement two identification strategies: First, we instrument for electricity prices with global oil prices along with state-level monthly heatingand cooling-degree-day data, while controlling for state × industry fixed effects. Second, we employ a triple-differencing method that exploits differential changes in time across industries and states, removing common trends in each state and industry. Preliminary results suggest that employment faces about a -0.2 elasticity in the face of higher energy prices. Based on recent estimates that climate change regulation would raise electricity prices by 8 percent, this suggests a 1.6 percent decline in manufacturing employment. May 1, 2012 Draft; Comments Welcome; Do Not Cite 1 How Will Climate Change Policies Affect Domestic Manufacturing?