The effects of carbon border adjustment mechanism on the energy intensity of Turkish manufacturing firms

Policymakers have been trying to incentivize cleaner and more energy-efficient production for a long time. Significant steps have been taken to decrease carbon emissions in production, starting with the Kyoto Protocol and the latest being the Carbon Border Adjustment Mechanism signaled by the Paris Agreement. In this paper, we investigate the effects of the Paris Agreement, adopted by 196 counties in 2015. The Agreement emphasizes the importance of international collaboration for climate neutrality, which allows the EU to voice its concerns about carbon leakage and propose a mechanism in which the EU Emissions Trading System applies in international trade. We take 2015 as the year of the signal (reform) and explore the Agreement's effects on the Turkish manufacturers, especially sectors subject to ETS, which are, by definition, the most energy-intensive sectors. We define energy intensity as the ratio of energy expenditures and cost of sales. Our base difference in differences analysis on Turkish manufacturing firms between 2010 and 2020 shows that ETS sectors were differentially affected by the reform. Their energy intensity decreased significantly by around 1% for all firms, 0.5% for exporters, and 0.4% for EU exporters compared to non-ETS sectors. We then ask whether the results are due to EU exporters or the effect disseminated to all the firms producing in ETS sectors. The DDD analysis conducted by including the firm-level export share shows that the effect is more dominant among exporters. We use only the firms that survived throughout the 11 years. The results show that as export share increases by 1%, energy intensity decreases by around 0.03% for ETS sectors after the reform.