Is Germany Becoming the European Pollution Haven?

Relative prices determine competitiveness of different locations. In this paper, we focus on the role of regulatory differences between Germany and other EU countries which affect the shadow price of carbon emissions. We calibrate a Melitz-type model, extended by firms’ emissions and abatement decisions using data on aggregate output, trade and emissions. The parameter estimates are estimated from the German Manufacturing Census. The quantitative model allows us to recover a measure of how environmental regulatory stringency evolved in Germany, the EU and the rest of the world: This implicit carbon price paid on emissions reflects energy and carbon prices in addition to command-and-control measures. Both in Germany and other EU countries, it decreased from 2005 to 2019 in most sectors, whith the trend being more pronounced in Germany than in the rest of the EU. In counterfactual analyses, we show that this intra-EU difference has substantially increased German industrial emissions. Had the EU experienced the same decrease in implicit carbon prices as Germany, German emissions would have been substantially lower. Germany has increasingly become a pollution haven.

von Graevenitz, Kathrine, Elisa Rottner and Philipp Richter (2023), Is Germany Becoming the European Pollution Haven?, ZEW Discussion Paper No. 23-069, Mannheim.