Conference Agenda

While most policymakers in developing countries recognize the need to tackle climate change, one of the key concerns in pursuing a stricter climate policy is that it could impair industrial competitiveness and thus slow down economic growth. This paper provides evidence on the impact of carbon abatement costs on firm performance in a developing economy using comprehensive microdata from Vietnam's manufacturing sector. For this purpose, we estimate firm-specific shadow prices of CO2 emissions as a holistic measure of carbon abatement costs, utilizing a state-of-the-art parametric directional distance function method that endogenizes directional vectors. The results of the instrumental variable estimation illustrate the trade-offs firms encounter between economic and environmental objectives as carbon abatement costs increase. In particular, we find that, on average, an increase in the shadow price of CO2 reduces revenues and employment, has no detectable effect on assets, wages, and profitability, but significantly increases productivity and energy savings. Moreover, the impact on firm performance varies considerably across sectors and firm characteristics. Adverse effects tend to be primarily concentrated in a subset of firms that are trade-exposed, energy-intensive, large or partially foreign-owned. In contrast, smaller firms are generally less affected and tend to absorb the additional costs more effectively.