Economics of the Environment: Businesses and Climate Change

• What can policy makers do to combat global warming?
• How should businesses and investors respond to climate change?
• How will climate change and environmental policies affect economic performance?

These are some of the most important questions facing humanity today. Within its Productivity and Innovation programme the CEP has gained access to an unusually wide range of firm level datasets over recent years. In the "Businesses and climate change" work stream we are relying on this data resource to make a contribution to the research and policy debate surrounding climate change.

This is a lively area of discussion on the CEP Blog (e.g.Taxing questions about carbon trading). Ralf Martin and John Van Reenen have also been involved in the government's Commission on the Environment and Economic Performance (CEMEP).

About one third of greenhouse gas pollution in industrialised countries is directly attributable to the industrial sector. In order to reduce overall carbon emissions by 60 percent or more as suggested for example in the Stern Review it is clear that significant reductions in pollution have to be achieved by businesses.

Energy intensity of businesses - a major determinant for greenhouse gas pollution intensity - varies considerably, even within narrow industrial sectors. Recent CEP research has shown that energy intensity in Britain is at least twice as dispersed as labour productivity between firms in the same sector. (See Energy efficiency and productivity of UK businesses: Evidence from a new matched database, DTI Occasional Paper No.5). This suggests that to understand the drivers for pollution and predict how the business sector will react to climate change policy interventions requires going beyond a sector level analysis and look at firm level data.

Good quality firm level data is however often hard to get hold of. Data sources are often either maintained by government and therefore confidential or by commercial providers that charge high usage fees. Many studies therefore rely on case studies or look only at a small number of firms. To draw conclusions that are sufficiently general to provide robust evidence base for policy it is important, however, to test hypotheses on datasets that are more representative of the underlying population.

Within the CEP Productivity and Innovation programme we have worked extensively with governmental datasets such as the Annual Respondents Database (ARD) or the Quarterly Fuels Inquiry (QFI) - both provided by the UK Office of National Statistics, Patent data provided by various patent offices or commercial datasets such as for example the Amadeus dataset from Bureau van Dijk.

Most importantly, we have matched different data sources, allowing analysing a wide range of variables at the firm level that are not jointly covered in any one of the underlying data sources. The resulting data resource can be used to address a variety of issue in the climate change debate.

Our research here focuses on 3 aspects

1. The determinants of energy intensity and pollution.
   
   
2. The firm level impact of climate change policy on both firm level pollution but also other outcome variables such as employment or productivity.
   
   
3. The determinants of climate change related innovation. (We have discussed some of the policy options in Climate Change: Economic Sense and Non-sense of Carbon Mitigation Policies, CEP Policy Analysis, Paper No' CEPPA003)

Ongoing projects in this work stream include:

• Energy Intensity and Productivity - An analysis of the link between energy intensity and productivity at the plant level for the UK, the US and other countries. (joint with Cheryl Grim, US Census, John Haltiwanger, University of Maryland and Steve Davies, University of Chicago. This project is supported by the Anglo German Foundation).
  
  
• Management and energy intensity - Are better managed firms less polluting?
  
  
• Climate change prediction markets. Investment and policy decisions related to climate change crucially depend on predictions of the future. Prediction markets have been successfully applied in a variety of contexts to come up with alternative and potentially more reliable forecasts of future outcomes. This project explores if this tool can usefully be employed in the context of climate change. Our first initiative was the design of a series of prediction market contracts to capture the outcome of the UNFCC negotiations regarding a successor to the Kyoto protocol, which are currently trading on Intrade. More details on this initiative can be found on the CEP Blog
  
  
• A firm level evaluation of UK climate change levy and the climate change agreements (joint with Ulrich Wagner, Earth Institute, Columbia University). This project is supported by the ESRC (Grant Reference -000-22-2711).

For further information contact Ralf Martin (r.martin@lse.ac.uk, +44(0)207955 6975)