Cheaper Abroad – Climate Policies and Offshoring

• Applicant: Dr. Elisa Rottner
• Subject Area: Economic Policy, Applied Economics ; Statistics and Econometrics
• Term: since 2026
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 577606424

Production has become increasingly fragmented in today’s globalised world. This fragmentation matters for climate change. Countries and intermediates differ strongly in terms of their emission intensity. Where firms buy which intermediates, therefore, does not only affect employment, but also domestic and global emissions. Understanding patterns in and drivers of firms’ sourcing strategies matters for determining appropriate strategies for decarbonising the economy. Climate policies may increasingly constitute a driver of firms’ sourcing strategies. In such a case, in a world of incomplete regulation, unilateral climate policies might prove less effective or even ineffective: Unilateral climate policies might simply induce firms to offshore emission intensive production steps abroad with an accompanying increase in the carbon content of imports, leading to so called carbon leakage. Despite its importance, it is not clear whether firms in fact change their sourcing strategies in response to climate policies. While theoretical models and computable general equilibrium models predict increased offshoring in response to unilateral climate policies, empirical evidence is scant, owing to the lack of firm level data on offshoring and the low climate policy stringency in the past. Many open questions remain. In this proposal, I focus on three questions: 1) Is there empirical evidence for offshoring of intermediate inputs in response to an increasingly stringent climate policy on the firm level? 2) How substitutable were energy, domestic inputs, and foreign inputs in the past? 3) What will be the consequences of future climate policy choices? For this purpose, first, I estimate how regulation under the EU’s emissions trading system (EU ETS) affects firms’ sourcing decisions through rigorous empirical work relying on recent advances in difference-in-differences estimation and firm level data from a major European economy (France). This analysis identifies effects for a very specific subset of firms regulated under the EU ETS through quasi-experimental methods. In a second step, I will analyse the more fundamental substitutability between energy use (and the accompanying carbon emissions) and intermediate inputs using structural estimation. For this, I will derive an estimable production function from a formal sourcing model that puts structure on the complex sourcing strategies of firms. The model structure together with the estimated parameters on the substitutability between energy/carbon emissions, domestic, and foreign intermediate inputs allows, in a third step, for an analysis of counterfactual scenarios to understand, e.g., the consequences of an energy price increase, or the consequences of rising import prices due to the EU’s carbon border adjustment mechanism (CBAM) for French productivity, employment, and emissions.

• DFG Programme: Fellowship
• International Connection: United Kingdom
• Host: Professor Gregor Singer