Capacity decisions with demand fluctuations and carbon leakage
AbstractFor 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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Date of creation: Oct 2013
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carbon leakage; demand fluctuations; capacity decisions.;
Other versions of this item:
- Meunier, Guy & Ponssard, Jean-Pierre, 2014. "Capacity decisions with demand fluctuations and carbon leakage," Resource and Energy Economics, Elsevier, vol. 36(2), pages 436-454.
- Guy Meunier & Jean-Pierre Ponssard, 2014. "Capacity Decisions with Demand Fluctuations and Carbon Leakage," CESifo Working Paper Series 4627, CESifo Group Munich.
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- D92 - Microeconomics - - Intertemporal Choice - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
- Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-03-28 (All new papers)
- NEP-ENE-2009-03-28 (Energy Economics)
- NEP-ENV-2009-03-28 (Environmental Economics)
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