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Emission Intensity and Firm Dynamics: Reallocation, Product Mix and Technology in India

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Geoffrey Barrows and Hélène Ollivier

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The geography of greenhouse gas emissions has changed radically in recent decades and the emerging economies – China, India and Brazil – represent a growing part of global emissions, even if their per capita emissions remain relatively low compared with the industrialised countries. These countries are the most integrated into global trade, and their integration can be seen as favouring the growth of global emissions according to the “pollution haven” hypothesis. This hypothesis says that polluting firms choose to relocate to countries with weak environmental regulation, while exporting their products to developed countries.

In this article, Geoffrey Barrows and Hélène Ollivier examine a phenomenon that counter-balances this growth in emissions of emerging economies that is linked to their international integration: the reduction in emission intensity of industrial production in emerging economies, and specifically, India. Using data from Indian industrial firms, they show that over the past twenty years, these firms have drastically reduced their quantity of CO2 emissions by product unit, and have done so in the absence of environmental policies like the “carbon tax”. This improvement in environmental performance is surprising, meriting theoretical explanation and empirical validation. The authors explain that two main factors have caused the reduction in emission intensity. On the one hand, the most productive firms have won market share, forcing some barely viable firms into to bankruptcy. As enterprises produce most efficiently, they have need of less energy, and therefore emit fewer emissions than their competitors. On the other hand, increased competition also pushes some firms to invest in more efficient, less energy-intensive technologies, which reduces the emissions intensity of their production. Barrows and Ollivier analyse a third factor, which they assert influences rising emissions within firms. Each enterprise has a product that constitutes its “core competence”, which is the most lucrative and generates the greater part of company profits. But it can also choose to diversify, to produce other, less profitable goods. In the case of India, the goods that constitute firms’ core competences are also less polluting; while firms concentrate on these products, they also reduce their emissions. But Indian firms have a tendency to diversify greatly their portfolio of goods, thus increasing their emissions intensity. However, it is the first two factors that are, overall, preponderant. These results suggest that in certain conditions, the search for profits can lead to a reduction in CO2 emissions intensity, even in the absence of specific environmental policies.

Original title of the article : “Emission Intensity and Firm Dynamics: Reallocation, Product Mix and Technology in India”
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