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HomePaperOpening the Brown Box: Production Responses to Environmental Regulation

Opening the Brown Box: Production Responses to Environmental Regulation

1 January 2024
Authors: Rebecca De Simone (London Business School), Lakshmi Naaraayanan (London Business School) and Kunal Sachdeva (Graduate School of Business, Rice University)
Abstract:

We study production responses to emission capping regulation on manufacturing firms. We find that firms reduced their pollution as they transitioned from self-generated to externally sourced electricity, shifted toward producing less coal-intensive products, and increased their abatement expenditures. Firms preserved profitability by increasing their production of higher-margin products. However, firms in highly polluting industries produced fewer products. In the aggregate, we document lower product variety, higher markups, an altered firm-size distribution, and lower business formation. Our findings highlight both the mechanisms behind how mandated pollution reduction can be effective and its costs, suggesting a loss in agglomeration externalities.

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