This paper examines the intensive and extensive margins of carbon leakage. The analysis uses an increase in the Swedish electricity price to identify the impact on imports at the firm and product level. Our model of heterogenous firms predicts that higher domestic electricity prices lead firms to substitute towards imports of electricity-intense products.
We test the predictions of the model using detailed firm-level data for Swedish manufacturing that includes the firm’s electricity use, their electricity cost, and the products they import, over the years 2001-2006 inclusive.
We find evidence that the impact of the electricity price is mostly a story about the extensive margin of firm imports: firms with a certain productivity respond to higher electricity prices by substituting towards relatively electricity-intense imported products. We do not find much support of an intensive margin effect, i.e. for the notion that an electricity price increase induces a broad response across firms in a given sector. Our empirical results identify the magnitude of the impact of the electricity price increase on imports and our findings characterize the firms that could be at risk to leakage.