Conference Agenda

EU industrial policy increasingly shields energy-intensive, trade-exposed firms from rising energy costs, largely through energy tax exemptions. Using German firm-level and state-aid data, we show that most of these exemptions are allocated through a statutory eligibility schedule conditioned on energy intensity, not export exposure, generating wide dispersion in firms' effective energy prices. The design creates two distortions: it reallocates output toward the most energy-intensive firms, and it penalizes abatement, since saving energy can cost a firm its eligibility. We then build a heterogeneous-firm open-economy model to study how exemptions interact with a carbon tax and affect emissions. In the model, exemptions have two opposing effects. By keeping production at home, they limit leakage to dirtier foreign firms. But the same reallocation toward energy-intensive firms raises the emission intensity of domestic output. The net effect on global emissions is ambiguous: exemptions can raise emissions even when domestic production is on average cleaner than foreign. At equal leakage protection, an output-based rebate dominates the exemption on efficiency and emissions. An export subsidy is intermediate but legally constrained.