Foreign demand, developing country exports, and CO2 emissions: Firm-level evidence from India

Over the past few decades, wealthy countries have relied increasingly on imports from developing countries, prompting concerns regarding the environmental effects of trade. Increased import demand in wealthy countries certainly increases export flows from developing countries, but emissions need not scale 1 for 1 with exports if domestic sales or emission intensity adjust endogenously to foreign demand. In this paper, we exploit detailed product-line information on production and emissions for Indian manufacturing firms to estimate how firms adjust their production decisions in response to demand shocks in trading partner markets. Using a shift-share instrument, we find that foreign demand growth increased growth in CO2 emissions at the firm level via output growth (scale effect), but that endogenous reductions in emission intensity mitigated roughly 40% of this effect. With output denominated in physical units, both effects are estimated net of price adjustments. The overall effect on CO2 emissions growth is positive, though statistically insignificant at conventional levels. We further document that the scale effect owes to increased growth in both export sales and domestic sales, and that firm-product emission intensity fell when expressed per physical unit of output. The latter result indicates that the firm-level intensity effect owes at least in part to technological adoption.