Energy Tax Exemptions and Industrial Production

Abstract

Unilateral climate policies are often accompanied by exemptions for energy intensive and trade-exposed industrial firms to avoid leakage from regulated to unregulated jurisdictions. This paper investigates the impact of a large electricity tax exemption on production levels, employment, and input choices in the German manufacturing industry. For two different policy designs, we show that exempted plants significantly increase their electricity use. This effect is considerably larger under a notched exemption policy, where passing an eligibility threshold yields inframarginal benefits, compared to a revised policy where these benefits have been largely removed. We detect no significant impact of the exemptions on production levels, export shares, and employment. Our results cast doubt on the necessity of energy tax exemptions to retain domestic production and caution against the use of notched exemption policies.