Does Trade Make Firms Cleaner? Theory and Evidence From Indian Manufacturing

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This paper investigates the impact of exporting on the CO2 emission intensity of manufacturing firms in India. Recent papers have argued that export market access encourages firms to upgrade technology, which lowers the emission intensity of production; however, data limitations confound previous attempts to separately identify productivity impacts from simultaneous changes in prices and product-mix. We present a model of how these alternative channels could also explain the results documented in the literature. Then, using a highly detailed production dataset of large Indian manufacturing firms that contains information on physical units of inputs and outputs by product, we are able to decompose the overall firm impact into three components — prices, product-mix, and technology. Export impacts at the firm level are identified from import demand shocks of foreign trading partners. We find that firms adjust emission intensity in quantity through changing output shares across products, but that firms do not lower emission intensity within products over time. Furthermore, we find that prices do not bias down estimates of emission intensity in value. The results imply that product mix is an important channel that can affect firm emission intensity, whose changes cannot thus be solely attributed to technology.