The Impact on U.S. Industries of Carbon Prices with Output-Based Rebates over Multiple Time Frames

The effects of a carbon price on U.S. industries are likely to change over time as firms and customers gradually adjust to new prices. The effects will also depend on the number of countries implementing the policy as well as offsetting policies to compensate losers. We examine the effects of a $15/ton CO2 price, including Waxman-Markey-type allocations to vulnerable industries, over four time horizons -- the very short-, short-, medium-, and long-runs -- distinguished by the ability of firms to raise output prices, change their input mix, and reallocate capital. We find that if firms cannot pass on higher costs, the loss in profits in a number of industries will indeed be large. When output prices can rise to reflect higher energy costs, the reduction in output and profits is substantially smaller. Over the medium- and long-terms, however, when more adjustments occur, the impact on output is more varied due to general equilibrium effects. The use of the H.R. 2454 rebates can substantially offset the output losses over all four time frames considered. We also consider competitiveness and leakage effects—changes in trade flows and changes in emissions in the rest of the world. We examine two measures of leakage: “trade-related” leakage that accounts for both the increased volume of net imports into the U.S. as well as the higher carbon intensity of these imports, and a broader leakage measure that includes the effect of increased fossil fuel consumption in countries not undertaking a carbon-pricing policy.carbon price, competitiveness, input-output analysis, output-based allocations, carbon leakage

Coordinating Global Trade and Environmental Policy: The Role of Pre-Existing Distortions

While economists generally agree that trade liberalization can be an important driver of economic growth, there is concern that increased trade can have negative impacts on the environment. One alternative is to coordinate trade liberalization with corrective environmental policies. A growing body of research, however, has shown that environmental policies may involve previously unrecognized welfare costs due to their interaction with pre-existing distortions in the economy. We augment the GTAP data base with data on taxes and labor market distortions and develop a global CGE model which accounts for tax interaction and revenue recycling effects. We explore a number of options for coordinated trade and environmental policy and find that accounting for second best effects can significantly alter the results. We show that coordinated trade and environmental reform could potentially be used to help break the current impasse between developed and developing countries over international climate policy

Trade Effects and Emissions Leakage Associated with Carbon Pricing Policies

In a previous work, we examined how the effects of a $15/ton CO2 price on U.S. industries change over four time horizons – the very short-, short-, medium-, and long-runs – as firms and consumers gradually adjust to new prices. We showed that the effects also depend on the number of countries implementing the policy as well as the use of offsetting policies, such as output-based rebates, to compensate losers. In the current extension of that work, we explore in greater depth competitiveness and emissions leakage issues – changes in trade flows and changes in emissions in countries without a carbon policy. Using a global CGE model based on GTAP 7 data, we focus on the long run effects of a multilateral carbon pricing policy, with and without output-based rebates applied to U.S. industries

Exploring the General Equilibrium Costs of Sector-Specific Environmental Regulations

The requisite scope of analysis to adequately estimate the social cost of environmental regulations has been subject to much discussion. The literature has demonstrated that engineering or partial equilibrium cost estimates likely underestimate the social cost of large-scale environmental regulations and environmental taxes. However, the conditions under which general equilibrium (GE) analysis adds value to welfare analysis for single-sector technology or performance standards, the predominant policy intervention in practice, remains an open question. Using a numerical computable general equilibrium (CGE) model, we investigate the GE effects of regulations across different sectors, abatement technologies, and regulatory designs. Our results show that even for small regulations the GE effects are significant, and that engineering estimates of compliance costs can substantially underestimate the social cost of single-sector environmental regulations. We find the downward bias from using engineering costs to approximate social costs depends on the input composition of abatement technologies and the regulated sector

Trade Effects and Emissions Leakage Associated with Carbon Pricing Policies

In a previous work, we examined how the effects of a $15/ton CO2 price on U.S. industries change over four time horizons – the very short-, short-, medium-, and long-runs – as firms and consumers gradually adjust to new prices. We showed that the effects also depend on the number of countries implementing the policy as well as the use of offsetting policies, such as output-based rebates, to compensate losers. In the current extension of that work, we explore in greater depth competitiveness and emissions leakage issues – changes in trade flows and changes in emissions in countries without a carbon policy. Using a global CGE model based on GTAP 7 data, we focus on the long run effects of a multilateral carbon pricing policy, with and without output-based rebates applied to U.S. industries

Exploring the General Equilibrium Costs of Sector-Specific Environmental Regulations

Code and data to replicate simulations used in "Exploring the General Equilibrium Costs of Sector-Specific Environmental Regulations" by Alex Marten, Richard Garbaccio, and Ann Wolverton, in the Journal of the Association of Environmental and Resource Economists. Some of the data used in the modeling is proprietary and cannot be posted. We provide instructions for obtaining the remaining data and creating the datasets in readme.txt

The Impact on U.S. industries of Carbon Prices with Output-Based Rebates over Multiple Time Frames

The effects of a carbon price on U.S. industries are likely to change over time as firms and customers gradually adjust to new prices. The effects will also depend on the number of countries implementing the policy as well as offsetting policies to compensate losers. We examine the effects of a $15/ton CO2 price, including Waxman-Markey-type allocations to vulnerable industries, over four time horizons—the very short-, short-, medium-, and long-runs—distinguished by the ability of firms to raise output prices, change their input mix, and reallocate capital. We find that if firms cannot pass on higher costs, the loss in profits in a number of industries will indeed be large. When output prices can rise to reflect higher energy costs, the reduction in output and profits is substantially smaller. Over the mediumand long-terms, however, when more adjustments occur, the impact on output is more varied due to general equilibrium effects. The use of the H.R. 2454 rebates can substantially offset the output losses over all four time frames considered. We also consider competitiveness and leakage effects—changes in trade flows and changes in emissions in the rest of the world. We examine two measures of leakage: ―trade-related‖ leakage that accounts for both the increased volume of net imports into the U.S. as well as the higher carbon intensity of these imports, and a broader leakage measure that includes the effect of increased fossil fuel consumption in countries not undertaking a carbon-pricing policy

The Impact on U.S. industries of Carbon Prices with Output-Based Rebates over Multiple Time Frames

The effects of a carbon price on U.S. industries are likely to change over time as firms and customers gradually adjust to new prices. The effects will also depend on the number of countries implementing the policy as well as offsetting policies to compensate losers. We examine the effects of a $15/ton CO2 price, including Waxman-Markey-type allocations to vulnerable industries, over four time horizons—the very short-, short-, medium-, and long-runs—distinguished by the ability of firms to raise output prices, change their input mix, and reallocate capital. We find that if firms cannot pass on higher costs, the loss in profits in a number of industries will indeed be large. When output prices can rise to reflect higher energy costs, the reduction in output and profits is substantially smaller. Over the mediumand long-terms, however, when more adjustments occur, the impact on output is more varied due to general equilibrium effects. The use of the H.R. 2454 rebates can substantially offset the output losses over all four time frames considered. We also consider competitiveness and leakage effects—changes in trade flows and changes in emissions in the rest of the world. We examine two measures of leakage: ―trade-related‖ leakage that accounts for both the increased volume of net imports into the U.S. as well as the higher carbon intensity of these imports, and a broader leakage measure that includes the effect of increased fossil fuel consumption in countries not undertaking a carbon-pricing policy