Abstract
Market-based energy policy instruments are relatively uncommon in developing countries. In this paper, we evaluate the economic impact of a novel policy instrument in India that combined an energy intensity standard with a market-trading mechanism. Using plant-level panel data on the cement industry from 2006–2015, we find that while the policy had weak overall effects on plant-level total factor productivity (TFP), it had a positive effect on the TFP of plants that were already energy-efficient prior to the policy. In disentangling the underlying mechanisms, we find that these plants increased their scale of production in response to the policy, which also resulted in reductions in energy intensity. The findings of this study lend only partial support to the strong version of the Porter Hypothesis for a pollution-intensive industry in a large developing country, showing that firms can respond heterogeneously to market-based measures based on pre-treatment energy efficiency.