The unintended consequence of trade liberalization: Input tariff reduction and firm energy rebound effect in China

This paper studies the impact of input tariff reductions on firms’ energy rebound effect in China. We present a theoretical framework to elucidate how input tariff reduction shapes the factor substitution and output expansion that determine the rebound effect. Our empirical strategy employs a difference-in-difference-in-differences method that is robust to endogeneity concerns regarding energy efficiency and compares the energy rebound effect of Chinese manufacturers across industries that experienced varying degrees of input tariff reductions following WTO accession. We find that firms more affected by input tariff reductions experience a significantly larger exacerbation in their energy rebound effect than those less affected. We also find evidence suggesting that this effect is mainly driven by output expansion. Our results highlight a hidden cost of trade liberalization, that is, an intensified energy rebound effect leads firms to fail to realize anticipated energy savings and reductions in greenhouse gas emissions following improvements in energy efficiency.