Changing the Geography of Emissions and Production through Industrial Policy in Europe

• Applicant: Professorin Kathrine von Graevenitz, Ph.D.
• Subject Area: Economic Policy, Applied Economics
• Term: since 2025
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 566606676

Recent years have been characterized by overlapping policy challenges: the pandemic, the war in Ukraine accompanied by the energy crisis and increasing geopolitical tension, as well as the escalating climate crisis. Policymakers are responding using industrial policies which overlap and interact with climate policies. Industrial policies not only affect the level of production and emissions in a single country, but also affect their distribution across countries. In a setting like the European Union, where carbon emissions are capped and traded in a single emission trading system, there is an incentive for member states to strategically support their own industry and shift the burden of emissions reductions onto other member states. Industrial policy in a single country that affects energy use of select domestic firms (e.g., an energy tax exemption) has a direct impact on competition within the EU, but it could also affect carbon prices in the ETS and thereby spill over to other EU members and sectors not directly affected by the industrial policy. Individual industrial policies therefore shape the geography of production and emissions within the EU through both a direct and an indirect channel. We ask how industrial policies have shaped the geographic distribution of emissions and production across Europe ex post. To this purpose, we combine structural modelling with empirical analysis. We anticipate three main contributions: 1) We create a new extensive micro data set using state aid data as proxies for industrial policies. We combine different EU registries on state aid expenditures and extend them by information retrieved using text mining techniques. We augment the resulting data set with firm level data on production and emissions. 2) We extend a Melitz type trade model by an emission trading system with a cap. We derive the equilibrium impacts of a single country’s industrial policies on trade, production, emissions, entry, exit and productivity in all countries subject to the ETS. We calibrate and quantify the model and use it to analyse how industrial policies in the EU have changed the trajectory of carbon shadow prices, exploiting structural model relations. 3) Using our firm level data set on production, emissions and firm-specific state aid expenditures across the EU, we evaluate ex post how industrial policies have affected the production and emissions of manufacturing firms and compare insights from our empirical exercise with counterfactuals simulated using our quantitative model.

• DFG Programme: Research Grants
• Co-Investigator: Dr. Philipp Richter