Transnational Municipal Networks and Firm Investment in Energy and Carbon Intensity

• In Event: State and Local Energy and Climate Governance

Abstract

Transnational Municipal Networks (TMNs) on climate and energy issues have grown significantly in the 21st century. There is evidence that local governments joining these TMNs achieve targeted outcomes such as a reduction in energy consumption or carbon emissions. Nevertheless, the actual mechanisms by which TMNs affect energy consumption or carbon emissions have not been studied well. This paper studies how local governments’ participation in global climate networks shapes firm-level energy and carbon intensity by altering investment incentives. While past literature utilized reduced form models linking TMN membership to energy consumption of aggregate local energy consumption, we identify how TMN membership affects firm-level investment and energy consumption.

Our research question is: How do TMNs on climate and energy issues affect firms’ energy and carbon intensity, and through which mechanisms? To address this question, we develop a system of equations and connect it to micro-level data for empirical validation. The empirical analysis links establishment-level data on manufacturing plants from the 2014, 2018, and 2022 Manufacturing Energy Consumption Survey with firm-level information from the 2023 Annual Business Survey, which uniquely measures energy use, emissions, and relevant investment. We also use a city networks membership dataset provided by Drs. Michele Acuto and Benjamin Leffel. Identification exploits staggered adoption of TMN membership across cities and counties in a difference-in-differences framework. To isolate mechanisms, we also estimate a system of equations that jointly model investment and energy and carbon intensity outcomes.

Results show that TMN membership significantly reduces establishment-level energy and carbon intensity. The effects operate primarily through increased investment in energy-efficient and low-carbon technologies. The impact is amplified when local and state governments participate simultaneously, consistent with complementarities in policy signals and expectations. These findings suggest that TMNs influence firm behavior by coordinating policy environments and reducing uncertainty about the direction of climate policy.

This paper provides micro-founded evidence on how non-binding, network-based governance affects firm decision-making. More broadly, it highlights the role of policy networks in driving the energy transition, offering a new perspective on the effectiveness of decentralized climate governance. This presents that local governments voluntarily achieve policy outcome via their network even without the support from federal governments. Federal governments may increase the policy effectiveness to support local governments to join the TMNs or stimulate the network participation.

Author

• Minsu Kim, Pennsylvania State University
  Presenting Author