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The Effect of Electricity Taxation on the German Manufacturing Industry: a Regression Discontinuity
Approach.
6th AWEEE: Frontiers in the Economics of Energy Efficiency June 25, 2014
Benjamin J. Lutz, Centre for European Economic Research (ZEW), Germany
Co-authored with Florens S. Flues, Organisation for Economic Co-operation and Development (OECD), France
Funded by the Helmholtz Alliance ENERGY-TRANS
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Executive Summary
3
Quasi-experimental study: Did the German electricity tax have a causal impact on economic and environmental performance of firms from the manufacturing industry?
Outcome variables: turnover, turnover abroad, employment, investments, electricity intensity
The electricity tax is a function of electricity use. Discontinuities in the tax function create local random experiments that enable us to identify the causal impact
The empirical analysis is based on official plant- and firm-level census data gathered by the German Federal Statistical Office
Results: The electricity tax did not have a statistically significant causal impact on regulated firms
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Motivation
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Ambitious climate policy targets in Germany for 2020: need for effective and efficient instruments to foster energy efficiency improvements
Manufacturing industry large consumer of electricity and of high economic importance In 2012, the manufacturing industry (incl. mining and quarrying)
accounted for 28.9% of Germany’s final energy consumption and 43.5% of the total electricity consumption (AGEB 2013)
In 2012, the manufacturing industry (incl. mining and quarrying) generated 26.0% of gross value added (Destatis 2013)
Gap in the empirical literature: There is only scarce empirical
literature on the causal impact of market-based environmental regulation (Fowlie et al., 2012; Martin et al., 2014; Petrick and Wagner, 2014)
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Identification Strategy The marginal tax rate is a deterministic and discontinuous function of
the electricity use The tax reduction scheme creates local random experiments at the
thresholds
Development of the electricity tax scheme over time
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Identification Strategy The marginal tax rate is a deterministic and discontinuous function of
the electricity use The tax reduction scheme creates local random experiments at the
thresholds
Development of the electricity tax scheme over time
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Identification Strategy
7 Electricity used (MWh)
Mar
gina
l tax
rate
(EU
R/M
Wh)
50
Regression Discontinuity Design: Local Treatment Effect
100
Year-by-year analysis: tax reduction scheme in 1999
2
10
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Identification Strategy
8 Electricity used (MWh)
Mar
gina
l tax
rate
(EU
R/M
Wh)
50
Regression Discontinuity Design: Local Treatment Effect
100
2
10 Identification based on difference between regular and reduced tax rate
Year-by-year analysis: tax reduction scheme in 1999
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Identification Strategy
9 Electricity used (MWh)
Mar
gina
l tax
rate
(EU
R/M
Wh)
50
Regression Discontinuity Design: Local Treatment Effect
100
2
10 Identification based on difference between regular and reduced tax rate
Comparison of firms next to the threshold: control vs. treatment group
Year-by-year analysis: tax reduction scheme in 1999
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Identification Strategy
10 Electricity used (MWh)
Mar
gina
l tax
rate
(EU
R/M
Wh)
50
Regression Discontinuity Design: Local Treatment Effect
100
2
10 Identification based on difference between regular and reduced tax rate
Comparison of firms next to the threshold: control vs. treatment group
Firms of control and treatment group face different marginal tax rates, i.e. different marginal costs associated with electricity use
Year-by-year analysis: tax reduction scheme in 1999
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Potential Outcome
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Assumptions: i. outcome variables are continuous functions of electricity use; ii. firms do not precisely control the forcing variable electricity use
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Potential Outcome
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Assumptions: i. outcome variables are continuous functions of electricity use; ii. firms do not precisely control the forcing variable electricity use
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Identifying Assumptions
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Inability to precisely control the assignment variable
Probability of treatment is a discontinuous function of the assignment
variable
Local continuity restriction
Stable unit treatment value assumption (SUTVA)
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Identifying Assumptions
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Inability to precisely control the assignment variable
Probability of treatment is a discontinuous function of the assignment
variable
Local continuity restriction
Stable unit treatment value assumption (SUTVA)
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Analytical Framework
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Marginal tax rate t as a function of electricity used Xi
Potential outcome framework:
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Analytical Framework
Sharp discontinuity in the conditional expectation of the outcome given electricity used to unveil an average causal effect of the treatment (Imbens and Lemieux, 2008; Lee and Lemieux, 2010):
Term interpreted as local average treatment effect:
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Estimation of the Local Treatment Effect
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Non-parametric local polynomial estimator with robust data-driven
bandwidth selection and consistent standard errors (Calonico et al., 2013, 2014)
Estimator for the local average treatment effect at the threshold:
Constants of a weighted polynomial regression
Yi: Turnover, turnover abroad, number of employees, investments. electricity intensity
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Data: German Manufacturing Census
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Econometric analysis exploits official plant- and firm-level census
data gathered by the German Federal Statistical Office on an annual basis
All firms of the manufacturing sector with more than 20 employees are included: participation is mandatory
Data set covers characteristics, such as performance measures,
investments, and energy consumption Analysis focusses on the years 1999-2005
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Data: Descriptive Statistics
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Results: Local Treatment Effects
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Turnover, investments and turnover abroad are denoted in EUR 1000. P Values in parantheses. ** sign. at 1% level; * sign. at 5 % level
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Results: Local Treatment Effects
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Turnover, investments and turnover abroad are denoted in EUR 1000. P Values in parantheses. ** sign. at 1% level; * sign. at 5 % level
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Results: Local Treatment Effects
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Turnover, investments and turnover abroad are denoted in EUR 1000. P Values in parantheses. ** sign. at 1% level; * sign. at 5 % level
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Results: Graphical Analysis
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Results: Graphical Analysis
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Conclusion
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No significant causal effect of electricity tax on firms’ turnover,
turnover abroad, number of employees, investments, electricity intensity
Other studies on the causal impact of environmental regulation on the manufacturing sector in Europe also show no evidence for adverse effects on competitiveness (Martin et al., 2014; Petrick and Wagner, 2014)
Elimination of tax reduction scheme would increase revenues for the government without significantly harming firms – additional tax revenues could be used to lower taxes or social security contributions on labor
To be done:
RDD in combination with stochastic frontier analysis
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Back Up
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Distribution of the Assignment Variable
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Distribution of the Assignment Variable
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Potential Outcome
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Assumptions: i. outcome variables are continous function of electricity use; ii. firms do not precisely controll the forcing variable electricity use
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Results: Local Treatment Effects (ctd)
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Turnover, investments and turnover abroader are denoted in EUR 1000.
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Relevance: Ambitious Policy Targets
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Objectives European and German climate and energy policy
EU’s 20-20-20 targets set three key objectives for 2020: 20% reduction in greenhouse gas emissions from 1990 levels Raising the share of EU energy consumption produced from
renewables to 20% 20% improvement in the EU's energy efficiency (20% saving of
the EU’s primary energy consumption)
Germany’s targets for 2020: 40% reduction in greenhouse gas emissions from 1990 levels Raising the share of EU energy consumption produced from
renewables to 35% doubling of the energy productivity (ratio of gross domestic
product to primary energy consumption), based on 1990 figures
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Specific energy and electricity consumption German industry
Motivation: Incentive Effects
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MJ / EUR1000 kWh / EUR1000
370
380
390
400
410
420
430
440
450
460
470
0
1000
2000
3000
4000
5000
6000
7000
Final energy consumption (MJ) per EUR 1000 gross value added (2005 prices)
Final electricity consumption (kWh) per EUR 1000 gross value added (2005 prices)Source: FME
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Motivation: Effects on Competitiveness
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Electricity price for industrial consumers - international comparison
Source: FSO
0
0,05
0,1
0,15
0,2
0,25
H1 2008 H2 2008 H1 2009 H2 2009 H1 2010 H2 2010 H1 2011 H2 2011 H1 2012 H2 2012
GermanyFranceItalySwedenPolandUK
EUR
/kW
h
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Mineral Oil Tax Act
1991
Electricity Tax Act
Renewable Energies Act
Energy Tax Act
Electricity Feed-In Act
1999 2000 2006
CHP Act
2002
Background and Approach Legal development in German energy taxation
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Mineral Oil Tax Act
1991
Electricity Tax Act
Renewable Energies Act
Energy Tax Act
Electricity Feed-In Act
1999 2000 2006
CHP Act
2002
Background and Approach Legal development in German energy taxation
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Relevance
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Final energy consumption Germany
Source: FME
0
2000
4000
6000
8000
10000
12000
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Final energy consumption (PJ) total
Final energy consumption (PJ) industry
PJ
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9,34 8,86
6,05 6,47 6,86 7,98 8,92 9,73
11,53 11,41 13,25
11,4 12,07 14,04 14,33 14,87
17,11 16,53 13,94 14,32
16,11 17,19 17,96 18,66 19,46 20,64 21,65
23,21 23,69 25,23 25,89
28,73
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Comparison of Electricity Prices (Cent/kWh)
Industrial Electricity Price Household Electricity PriceSource: BDEW Strompreisanalyse May 2013
Electricity: Price-Development
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Motivation: Effects on Competitiveness
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Absolute and relative energy costs of the German industry
Source: FME
0
0,5
1
1,5
2
2,5
0
5000
10000
15000
20000
25000
30000
35000
40000
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Energy costs (m EUR)
Relative energy costs (% of gross output)
Percentage Mill
ion
EUR
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Motivation: Effects on Competitiveness
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Relative energy costs (% of gross value) energy intensive industries
Source: FME
0
1
2
3
4
5
6
7
8
9
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Pulp and paperChemical industryProduction and processing of metalsManufacture of other non-metallic mineral product
Perc
enta
ge
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9,26 8,62
5,59 5,91 6,15 6,33 7,18 7,81
9,42 9,16 10,86
8,86 8,79 8,97 9,2 8,06
0,08
0,09
0,2 0,24 0,35 0,42 0,51
0,69
0,88 1,02
1,16
1,31 2,05 3,53 3,592 5,277
0,15
0,26 0,31 0,36 1,23
1,23 1,23
1,23 1,23
1,23
1,23 1,23
1,54 1,54 1,54
0
2
4
6
8
10
12
14
16
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Cen
t /kW
h
Other Components EEG-Reallocation Charge Electricity Tax
Source: BDEW Strompreisanalyse May 2013
Electricity: Components of the Price
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Relevance
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Final energy consumption Germany
Source: FME
29%
29%
27%
15% Industry
Transport
Households
Trade, commerce andservices
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