Singer, Gregor (2024) Complementary inputs and industrial development: can lower electricity prices improve energy efficiency? Grantham Research Institute on Climate Change and the Environment Working Paper (407). Grantham Research Institute on Climate Change and the Environment, London School of Economics and Political Science, London, UK.
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Abstract
The transition from traditional labor intensive to modern capital intensive production is a key factor for industrial development. Using half a million observations from Indian manufacturing plants, I analyze the effects of a secular decrease in industrial electricity prices through the lens of a model with technology choices and complementarities between electricity and capital inputs. Using instrumental variables, I show how lower industrial electricity prices can increase both labor productivity and electricity productivity. Apart from positive effects on firm economic and environmental performance, cost-price pass through significantly benefitted consumers, and the productivity improvements limited increases in carbon emissions.
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