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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, CIRED - Centre international de recherche sur l'environnement et le développement - CIRAD : UMR56 - CNRS : UMR8568 - Ecole des Hautes Etudes en Sciences Sociales - Ecole Nationale des Ponts et Chaussées - Ecole Nationale du Génie Rural des Eaux et des Forêts)
Jean-Pierre Ponssard (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X)

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Abstract

This paper investigates the optimal mix between home capacity and imports to face an uncertain demand. It is proved that, if the difference between the home variable cost and the import price is large, the optimal home capacity increases as uncertainty increases, while it decreases if it is small. The model is calibrated using data from the cement sector to study the impact of a unilateral high CO2 price in Europe. The results suggest a higher carbon leakage rate and more relocation of the industry than deterministic models would.

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Paper provided by HAL in its series Working Papers with number hal-00347650_v1.

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Date of creation: Dec 2008
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Handle: RePEc:hal:wpaper:hal-00347650_v1

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Related research
Keywords: capacity decisions; demand uncertainty; relocation; climate policy; carbon leakage.;

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  1. Jones, Robert A & Ostroy, Joseph M, 1984. "Flexibility and Uncertainty," Review of Economic Studies, Blackwell Publishing, vol. 51(1), pages 13-32, January. [Downloadable!] (restricted)
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  2. Grubb, M. & Neuhoff, K., 2006. "Allocation and competitiveness in the EU emissions trading scheme: policy overview," Cambridge Working Papers in Economics 0645, Faculty of Economics, University of Cambridge. [Downloadable!]
  3. Roland Ismer & Karsten Neuhoff, 2007. "Border tax adjustment: a feasible way to support stringent emission trading," European Journal of Law and Economics, Springer, vol. 24(2), pages 137-164, October. [Downloadable!] (restricted)
  4. Jean J. Gabszewicz & Sougata Poddar, 1997. "Demand fluctuations and capacity utilization under duopoly," Economic Theory, Springer, vol. 10(1), pages 131-146. [Downloadable!] (restricted)
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  5. Marcel Boyer & Michel Moreaux, 1989. "Uncertainty, Capacity and Flexibility: the Monopoly Case," Annales d'Economie et de Statistique, ADRES, issue 15-16, pages 14, Juillet-D. [Downloadable!]
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  6. Arrow, Kenneth J & Fisher, Anthony C, 1974. "Environmental Preservation, Uncertainty, and Irreversibility," The Quarterly Journal of Economics, MIT Press, vol. 88(2), pages 312-19, May. [Downloadable!] (restricted)
  7. Henry, Claude, 1974. "Investment Decisions Under Uncertainty: The "Irreversibility Effect."," American Economic Review, American Economic Association, vol. 64(6), pages 1006-12, December. [Downloadable!] (restricted)
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