Carbon Pricing and Trade Diversion

joint with Giacomo Mangiante and Luca Moretti

This paper examines the impact of carbon pricing on the trading patterns of firms and the overall effect on CO2 emissions embedded in imports. We exploit carbon policy shocks, which are identified using high-frequency identification in combination with French administrative trade data and CO2 emission databases. We show that a tighter carbon pricing regime of the European Union Emission Trading System disproportionately increases imports from countries outside of the carbon price domain. However, this effect is not permanent and does not lead to persistent changes in trading patterns. We document that while CO2 emissions embedded in imports increases, this increase is slower than the response in value of trade, and firms mainly subsitute towards less CO2-intensive inputs. Finally, we show that policies for specific, mostly carbon-intensive, products and industries aimed at preventing carbon leakage are successful in their objective. 

Carbon Pricing and Inflation Expectations: Evidence from France 

joint with Giacomo Mangiante and Luca Moretti

Forthcoming in the Journal of Monetary Economics

This paper examines the impact of carbon pricing on firms’ inflation expectations and its implications for central banks’ price stability mandate. Carbon policy shocks are identified using high-frequency identification and combined with French firm-level survey data. A change in carbon price increases firms’ inflation expectations as well as their own expected and realized price growth. The effect on price expectations is more persistent than on actual price growth, resulting in negative forecast errors in the medium-/long-run. We show that a significant portion of the increase in inflation expectations is driven by indirect effects. Firms rely on their own business conditions to form expectations about aggregate price dynamics. Therefore, the expected positive growth in their own prices significantly contributes to the observed increase in inflation expectations. Firms’ responses to the shocks vary based on their energy intensity. Low energy-intensive firms are worse forecasters of the impact that the shocks will have on the evolution of their own prices. 

Optimal Short-Time Work: Screening for Jobs at Risk 

joint with Julian Teichgräber and Simon Žužek

Short-time work - a wage subsidy conditional on hour reductions - has become an important tool of labor market policy in many European countries. As the scope of these policies expanded, concerns about side effects due to adverse selection increased. We develop a model of job retention policies in the presence of asymmetric information to study selection into these programs. The social planner wants to prevent excessive job destruction but cannot observe which jobs are truly at risk. We do not restrict the social planner to use hour reductions a priori. Instead, we show that hour reductions of short-time work policies act as a screening mechanism to mitigate the adverse selection problem. This perspective of short-time work as a policy response to an underlying adverse selection problem provides an entirely new rationale for these policies. Our approach can be used to revisit recent empirical findings which rely on employment effects to evaluate existing short-time work schemes. In our model, however, average employment effects across groups are not sufficient to determine whether the policy is efficient. Indeed, we show that an optimal short-time work policy cannot avoid a small degree of adverse selection. This is particularly important in light of recent evidence that firms with small revenue shocks and no discernible employment effects have participated in short-time work programs at large costs to the public. In our model, these costs are information rents which are required to screen for jobs at risk. We calibrate our model to German data before the financial crisis and find that the optimal short-time work policy would have reduced separations by 1.2 - 2.4 percentage points.