Environmental Regulations and Export Dynamics: Firm-Level Evidence from Mexican Manufacturing
Abstract
Can environmental regulation reduce emissions without weakening export performance? This paper examines firm-level responses to sub-national air quality policies in Mexico. Between 2005 and 2014, manufacturing output rose while emissions declined sharply. A decomposition of these trends indicates that the majority of this decline stems from the technique effect, reflecting improved pollution abatement. Using detailed panel data and variation in policy implementation across municipalities, I show that regulations reduced firm-level emissions by 15% on average. However, these gains came with tradeoffs. Stricter regulations reduced export entry by 0.3%, increased exit by 2%, and lowered export sales by 13%. Effects are heterogeneous: smaller firms faced larger compliance burdens and higher exit rates, while larger firms exhibited relative resilience. To interpret these findings, I use a multi-sector general equilibrium model with endogenous abatement and technology choice. Counterfactual simulations show that environmental regulation was the primary driver of emission reductions, with a substantial increase in firms’ implicit pollution price over the period.
