<mark>if the policy response includes an increase in electricity subsidies.</mark> By contrast, rising electricity prices boost firm sales and productivity. These gains could be even more significant if a concurrent policy response introduces subsidies, which are fiscally costly and may transfer taxpayers' resources to firm owners and investors.

# **_Accounting for energy efficiency measures_**

<mark>This secton introduces the triple interacton among energy prices, industry-level energy intensity, and frm-level energy efciency measures. It uses the instrumental variable (IV) approach to address a possible endogeneity of the frm-level energy-efciency measures vis-à-vis the frm-level outcomes. This endogeneity may rise because well-performing frms may be more likely to implement energy-efciency measures rather than only energy-efciency measures afectng frm performance—raising reverse causality concerns. We use three candidate IV variables for the frm-level energy-efciency measures. The validity of all three IV variables relies on the assumpton that one frm taking an energy-efciency measure cannot signifcantly infuence all other frms of the same size across countries, frms in the same industry across countries, and frms in the same locaton (country).</mark> <mark>Namely, for each frm, we calculate the average likelihood of energy efciency measure adopton across frms of similar size, excluding the given frms from the calculaton, and the analogous averages for frms in the same subsector and in the same locaton, always excluding the given frm from the sample. Then, we generate three candidate IVs interactng for a given frm: (i) the size and sector averages, (ii) the size and subsector averages, and (iii) the size, subsector, and locaton averages. From (i)-(iii), the instruments are assumed to show greater relevance because the richer interacton of averages creates a synthetc frm that is more similar to the given frm. Table A4 in the Annex reports the results of the frst-stage regression of frm-level efciency measures on the thus constructed instrument for each frm. All three computed instruments are relevant and signifcant at the 1 percent level. The size-subsector-locaton instrument is the most signifcant, statstcally and economically; therefore, we use it as our baseline IV in this secton. We use the other two instruments in robustness checks.</mark> <mark>Table 3 reports the estmaton results for equaton (2) where we introduce the triple interacton of electricity prices, energy intensity of industries, and energy efciency measures or lack thereof. The later frm-level variable is instrumented by the size-sector-local average computed for each (excluding it from the computaton sample). By controlling for double and triple interacton between global oil prices and country-level energy (commercial) electricity prices (oil and electricity), subsectoral energy intensity, and locaton (country) intensity, the estmaton results reveal additonal signifcant heterogeneites. We focus again on the interactons that include electricity prices because the data is more granular (i.e. countrylevel commercial electricity rates), and the energy efciency measures reported at the frm level, which are mostly related to electricity consumpton such as the LEED certfcaton for buildings, adoptng efcient lightng systems, adherence to ISO 14001 or 50001 standards.</mark> <mark>The interactons of energy prices and energy intensity remain signifcantly positve for sales and productvity—as was the case in the estmaton results using double interactons only (and no triple interacton). When controlling for additonal heterogeneity in the specifcaton of equaton (2), the double interacton of energy intensity and oil prices becomes signifcantly negatve in the employment regression. The double interacton of energy intensity and electricity prices remains negatve but loses signifcance at common levels. However, this loss of signifcance would be due to the signifcant heterogeneity identfed by the double interacton of electricity prices and energy-efciency measures and the triple interacton of</mark> 10