This paper examines the heterogeneous effects of a domestic electricity price increase on the structure of imports. We develop a simple analytical model of heterogenous firms, which predicts that higher electricity prices lead firms to increase their demand for imported intermediate inputs. At the same time, we predict that higher electricity prices lead firms to increase their demand for electricity intense imports.
The model is estimated using detailed firm level data for Swedish manufacturing that includes the products they import, over the years 1997-2007 inclusive. Our identification strategy uses variation in the price of Swedish electricity to estimate how the structure of electricity intense imports respond at the firm level.
Our empirical results identify the magnitude of the impact of the electricity price increase on the structure of firm imports. Our findings agree with the predictions of our theoretical model.