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Capacity decisions with demand fluctuations and carbon leakage

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Author Info

  • Guy Meunier

    (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X, INRA-AliSS - UR 1303)

  • Jean-Pierre Ponssard

    (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X)

Abstract

For carbon-intensive, internationally-traded industrial goods, a unilateral increase in the domestic CO2 price may result in the reduction of the domestic production but an increase of imports. In such sectors as electricity, cement or steel, the trade ows result more from short-term regional disequilibria between supply and demand than from international competition. This paper formalizes this empirical observation and characterizes its impact on leakage. Domestic fi rms invest in home plants under uncertainty; then, as uncertainty unfolds, they may source the home market from their home plants or from imports. We prove that there would be no leakage in the short-term (without capacity adaptation) but there would be in the long-term (with capacity adaption). Furthermore, the larger the uncertainty the larger the leakage is. We also characterize the impacts of uncertainty on the (short-term and long-term) pass-through rates. In the concluding section we discuss the implications of these results for the evaluation of climate policies.

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Bibliographic Info

Paper provided by HAL in its series Working Papers with number hal-00347650.

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Date of creation: Oct 2013
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Handle: RePEc:hal:wpaper:hal-00347650

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Keywords: carbon leakage; demand fluctuations; capacity decisions.;

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Citations

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Cited by:
  1. repec:hal:ciredw:hal-00672907 is not listed on IDEAS
  2. Jean-Pierre Ponssard & Catherine Thomas, 2010. "Capacity Investment under Demand Uncertainty. An Empirical Study of the US Cement Industry, 1994‐2006," Working Papers hal-00511563, HAL.
  3. Guy Meunier & Jean-Pierre Ponssard & Philippe Quirion, 2012. "Carbon Leakage and Capacity-Based Allocations. Is the EU right?," CESifo Working Paper Series 4029, CESifo Group Munich.
  4. Gregory Cook & Jean-Pierre Ponssard, 2012. "A proposal for the revewal of sectoral approaches building on the Cement Sustainability Initiative," Working Papers hal-00681313, HAL.
  5. Guy Meunier & Jean-Pierre Ponssard & Philippe Quirion, 2012. "Carbon Leakage and Capacity-Based Allocations. Is the EU right?," Working Papers hal-00672907, HAL.
  6. Elisabetta Allevi & Giorgia Oggioni & Rossana Riccardi & Marco Rocco, 2013. "A spatial competitive analysis: the carbon leakage effect on the cement industry under the European Emissions Trading Scheme," Temi di discussione (Economic working papers) 899, Bank of Italy, Economic Research and International Relations Area.

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