DP8583 Why are firms that export cleaner? International trade and CO2 emissions
This paper develops a theoretical model of trade and environmental emissions with heterogeneous firms, where firms make abatement investments and thereby affect their level of emissions. We show that investments in abatement are positively related to firm productivity and firm exports, while emission intensity is negatively related to firms' productivity and exports. The basic reason for these results is that a larger production scale supports more investments in abatement and, in turn, reduces emissions per output. We find that trade liberalization weeds out the least productive and dirtiest firms thereby shifting production away from relatively dirty low productive local firms to more productive and cleaner exporters. The overall effect of trade is therefore to reduce emissions. We test the empirical implications of the model on emission intensity, abatement and exporting using firm-level data from Sweden. The empirical results support our model.