Centre for Economic Performance (CEP)


Green Growth

wind turbines

Recent work on Green Growth

The threat of human induced climate change has been described by many as one of the greatest challenges of our time, therefore it is important that economic growth is sustainable. The main culprit in climate change is Greenhouse Gas (GHG) emission with the biggest contribution coming from CO2. In this work programme we examine determinants of GHG emissions, mitigation options as well as economic impacts of climate change. Our main focus is on the business sector. Businesses are directly responsible for about one third of GHG emissions in industrialised countries. However, there is huge variation in the emission intensity of similar businesses even within the same sector both within and between countries. We study the determinants of this variation as well as the effectiveness and efficiency of policies aimed at reducing emissions. We also study the impact of climate change policy on competitiveness and economic performance, which is a major issue for policy makers.

However, when it comes to climate change businesses are not only polluters. Most experts agree that an essential component of addressing climate change is clean innovation; i.e. the development of new emission reducing products, services and processes. Much of this innovation will be undertaken by private businesses. One important focus of our research is the drivers of clean innovation and how policy can efficiently induce such innovation.

Recent or on-going projects in this work stream include:

  • Econometric Evaluation of the European Emissions Trading Scheme

    Antoine Dechezleprêtre, Raphael Calel, Jonathan Colmer, Ralf Martin, Mirabelle Muûls and Ulrich Wagner are working on the first facility and firm level evaluation of the causal impact of the EU Emissions Trading System (ETS) on emissions and other outcomes. They are looking at a number of outcomes including emissions and innovation across a wide range of European countries. First results indicate that the ETS reduced CO2 emissions by 10% or more in regulated establishments. There is also evidence of a positive effect on innovation. A discussion paper is coming soon.

    Further reading:
    Environmental Policy and Directed Technological Change: Evidence from the European Carbon Market

  • Climate Change Management Interviews

    Ralf Martin, Mirabelle Muûls, Laure de Preux and Ulrich Wagner have been conducting several waves of interviews with managers in a variety of European countries on issues related to climate change and climate change policies. This research established an association between management measures such as energy targets and the appointment of energy managers and reduced energy intensity. It also showed that the EU ETS has an impact on competitiveness only in a limited set of sectors and firms. Martin et al. also suggest more efficient ways of allocating pollution permits in the EUETS which would save money for European taxpayers.

    Further reading:
    Industry Compensation Under Relocation Risk: A Firm-Level Analysis of the EU Emissions Trading Scheme - this has subsequently been published in the American Economic Review (2014).

    Research related to this project has also been published in the Journal of Environmental Economics and Management (JEEM) (2012) and Ecological Economics (2014).

  • Evaluation of the Climate Change Levy

    Besides the EU ETS, the Climate Change Levy (CCL) is one of the main policy instruments of the UK government to induce CO2 energy consumption reductions of businesses. It is a tax on various fuels including electricity which was first introduced in 2001. Ralf Martin, Laure de Preux and Ulrich Wagner conducted the first firm level econometric evaluation of this policy. Results suggest that the levy had a significant negative impact on emissions by reducing electricity consumption. There is no evidence of a negative impact on economic activity or employment, which was feared by some when the policy was first introduced.

    Further reading:
    The impact of a carbon tax on manufacturing: Evidence from microdata - this has subsequently been published in Journal for Public Economics (2014).

  • Induced clean innovation in the car industry

    This project by Philippe Aghion, Antoine Dechezleprêtre, David Hemous, Ralf Martin and John Van Reenen (2012) looks at innovation in the car industry using a global patent database. They distinguish between clean radical clean innovation - i.e. technologies related to electric, hydrogen and hybrid vehicles - and dirty innovation - i.e. technologies related to the internal combustion engine. They find that firms tend to be locked into dirty technologies once the initial technological choice is made. However, the study also finds that emission pricing via fuel taxes is an effective instrument to induce more clean innovation.

    Further reading:
    Carbon Taxes, Path Dependency and Directed Technical Change: Evidence from the Auto Industry.

  • Spillovers and the growth effects of climate change policy

    Well-designed climate policy will increase economic growth in the long run by avoiding climate disasters. However, in the short to medium run this requires investments which will tend to reduce final consumption if not output. However, many policy makers have recently been suggesting that climate change policy can be good for growth even in the short to medium run. We examine if there is any evidence for this. Per capita growth is typically driven by technological advancement and innovation. While climate policy is likely to increases clean innovation and typically depresses dirty innovation. The net effect on overall growth can consequently be negative or positive. Theory suggests that it can only be positive if the innovation spillovers - i.e. economic benefits of an innovation that accruer to firms that are not paying for the R&D leading to the innovation - are higher for clean than for dirty technologies. The first study in this workstream by Antoine Dechezleprêtre, Ralf Martin and Myra Mohnen measures innovation spillovers using patent citation data. The result is surprisingly clear-cut: clean technologies generate much higher spillovers than dirty ones. Hence, this opens up the potential for short run as well as longer-run growth effects as promised by policy makers.