Measuring climate policy stringency: a shadow price approach

To assess the effect of environmental policy on production structures, trade structures, or foreign direct investment, a measure for the stringency of policy is necessary. Measures typically used in empirical studies share several disadvantages: they are not available on a sectoral basis to reflect concerns of industry competitiveness; they are not available for a wide range of countries to allow for international comparisons; or they are not broad enough to reflect the multidimensionality of environmental policy. This paper develops a thorough, internationally comparable, sector-specific measure of multidimensional climate policy stringency where a shadow price approach serves as a basis. The approach is applied to climate policy by determining sector-specific emission-relevant energy costs on the basis of the sectors’ usage of emission-relevant energy carriers and the carriers’ respective prices. The resulting shadow price estimates are heterogeneous and can be applied in future research to test for carbon leakage and pollution havens.