Research

Past periods of industrial development have gone hand in hand with the burning of coal, but there is little evidence on the effects of coal infrastructure on manufacturing growth in today's industrializing economies. We quantify the direct and indirect effects of coal-fired power plant commissioning on local incumbent manufacturing firms in Indonesia during a coal phase-in period between 1984 and 2015. We analyze spatially and temporally explicit manufacturing and power plant data in a stacked difference-in-difference framework. Leveraging quasi-random variation in treatment timing, we show that coal-fired power plants have led incumbent larger firms to increase employment, inputs, and outputs. In contrast, smaller firms remained unaffected. We identify mediating channels including improved electricity supply and transportation infrastructure, and increased competition for labor. Ongoing efforts to reduce global coal capacity need to take such effects into account.

Energy price subsidies and the use of generators by firms are common in low- and middle-income countries, leading to a critical mix of inefficient production structures. In the context of often unreliable electricity supply infrastructure, targeted subsidy reductions for fuel and electricity are politically challenging due to fears of adverse effects on production, further complicated by the widespread use of generators. We exploit a large energy subsidy reduction policy using a rich panel data set of manufacturing firms in Indonesia to estimate the impact on the performance of manufacturing firms. We find that firms experience slightly lower productivity and reduce output by lowering inputs of energy, materials, capital, and labor. Increases in diesel tariffs lead to nonadoption, while increases in electricity tariffs appear to lead to adoption of generator use. We also find that generator-dependent firms reduce total output, value added, material inputs, and labor relative to other firms as fuel tariffs increase. Our findings have important implications for the design of climate and energy policies, particularly in contexts where many firms rely on generators for electricity generation.

Our analysis explores the full range of the vertical and horizontal distributional impacts of carbon pricing, while addressing two important issues prevalent in low- and middle-income countries. First, there is a large observed gap between survey based and national accounts aggregates of household income. We address this gap by adjusting the survey based income distribution with correction factors based on detailed national accounts data and simulated distribution functions. Ignoring this data gap is shown to severely underestimate income inequality and results in skewed distributional impacts. Beyond this measurement issue, the second focus is on the institutional capacity for redistribution via social transfers. We identify available revenue recycling scenarios, drawing both on hypothetical and existing social transfer schemes in Indonesia, including unconditional cash transfers based on social registry information. While all revenue recycling schemes significantly reduce the average burden, available targeting mechanisms of social protection infrastructure are imperfect and exclude a substantial share of poor and vulnerable households. Our study has important implications beyond environmental policy, illustrating the empirical challenges of understanding the distributional implications of economic shocks in LMICs.