Climate Policy, Manufacturing Competitiveness and the Decision to Exit: Evidence from Germany

There are longstanding concerns that the costs of environmental regulations can reduce industry competitiveness, especially in the presence of incomplete regulation. Using detailed administrative data on manufacturing establishments in Germany, we empirically analyze how two prominent climate policies, as well as measures to mitigate their effective compliance costs, affect competitiveness outcomes. We estimate small or no direct effects of compliance costs on wages and employment in regulated establishments. However, we do find evidence of a reduction in the propensity to exit among establishments that were shielded from compliance costs. Our findings highlight that even when operating firms appear largely unaffected, meaningful impacts can still arise when accounting for firms opting to shut down.