Competitiveness in the Green Transition

Competitiveness in the green transition is increasingly vital, as the European Commission has made it a top priority for the coming years. In Chapter 2, I use a heterogeneous firm model to show that when emissions pricing exempts some firms within an industrial sector, these exempted firms gain a competitive advantage as carbon pricing becomes stricter. Specifically, less productive firms that do not participate in emissions pricing benefit from lower costs, allowing them to survive and even thrive in the market. This dynamic shifts market share from more productive, cleaner firms to exempted, dirtier firms, leading to within- country emissions leakage. The unintended consequence is that while regulated firms may reduce their emissions, unregulated firms increase theirs, undermining the overall effectiveness of emissions pricing. This problem is exacerbated when firms can strategically reduce their emissions to fall below exemption thresholds, further distorting production and market outcomes. Building on the industrial focus, Chapter 3 examines the impact of policies that affect the cost of using fossil fuels in production on the pattern of comparative advantage across manufacturing sectors. Firstly, we use a fixed-effects gravity model of trade to estimate the export capabilities that determine comparative advantage. Subsequently, using data on both direct and indirect carbon pricing policy instruments for 45 economies from 2010 to 2018, we estimate that a 10% increase in carbon price is associated with a decline in export capability in the most carbon-intensive industry by 0.3% to 0.7%. We also find empirical support for competitiveness spillovers to domestic downstream industries. Overall, changes in carbon pricing can explain up to 1.2% of the variation in export capabilities over time. We illustrate the potential impact of fossil fuel subsidies removal by comparing independent action to global coordination, concluding that coordinated efforts can reduce the adverse effects on comparative advantage. Continuing the focus on competitiveness in the green transition, the EU’s clean industrial policy also incorporates initiatives like the Raw Materials Act, which aims at reducing dependency on single-country suppliers for critical minerals and advancing recycling and domestic exploration. Chapter 4 connects directly to this by employing a two-region model to investigate the issue of market power in the supply of critical minerals needed for clean energy technologies such as wind turbines, solar panels, or batteries. In our model, we examine strategic competition between resource-rich regions (East) and resource-scarce ones (West). Both regions mine and trade minerals, which are essential for producing green technology goods needed to replace fossil fuels in energy production. Policy interventions include East cartelising its mineral markets and taxing mineral exports, while West may impose tariffs on green good imports or invest in domestic mineral recycling. While for both regions, imposing a tariff improves individual welfare when the other region has a tariff in place, retaliation comes at a cost: in the cooperative outcome (no tariffs), combined welfare could be 2.62% (2.60%) higher. While trade measures increase costs and slow the green transition, recycling subsidies in West can reduce resource dependency and support green capital production. Our model assumes West commits to a carbon budget, revealing a positive but concave relationship between West’s welfare and the budget stringency when climate damages are disregarded.