Recent trade theory describes how trade liberalization increases competition
and favors the growth of high-productivity firms. In this paper I
argue that because total factor productivity and efficient energy use frequently
go hand-in-hand, within-industry reallocation of market share
favors energy-efficient firms and can have significant benefits of avoided
fuel use and greenhouse gas emissions. Using 19 years of firm-level data
from India’s Annual Survey of Industries, I document that over a period
of 13 years within-industry reallocation of market share produced
a larger savings in greenhouse gases than is expected from all of India’s
Clean Development Mechanism energy efficiency and renewable energy
projects combined. Using industry-level variation in policy reforms, I
estimate the relative contributions of tariffs on final goods, tariffs on intermediate
goods, FDI reform, and delicensing on increasing energy ef-
ficiency within firms and on reducing market share of energy-inefficient
firms. I observe that reductions in tariffs on intermediate inputs led to
a 23% improvement in fuel efficiency, with the entire effect coming from
within-firm improvements. Delicensing and FDI reform, not tariffs on
final goods, drove the reallocation effect, with post-liberalization changes
in licensing requirements improving fuel efficiency an additional 7%.