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Market-Based Emissions Regulation and Industry Dynamics

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  • Meredith Fowlie
  • Mar Reguant
  • Stephen P. Ryan

Abstract

We assess the long-run dynamic implications of market-based regulation of carbon dioxide emissions in the US Portland cement industry. We consider several alternative policy designs, including mechanisms that use production subsidies to partially offset compliance costs and border tax adjustments to penalize emissions associated with foreign imports. Our results highlight two general countervailing market distortions. First, following Buchanan (1969), reductions in product market surplus and allocative inefficiencies due to market power in the domestic cement market counteract the social benefits of carbon abatement. Second, trade exposure to unregulated foreign competitors leads to emissions “leakage” which offsets domestic emissions reductions. Taken together, these forces result in social welfare losses under policy regimes that fully internalize the emissions externality. In contrast, market-based policies that incorporate design features to mitigate the exercise of market power and emissions leakage can deliver welfare gains.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18645.

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Date of creation: Dec 2012
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Handle: RePEc:nbr:nberwo:18645

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Citations

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Cited by:
  1. Natalia Fabra & Mar Reguant, 2013. "Pass-through of Emissions Costs in Electricity Markets," NBER Working Papers 19613, National Bureau of Economic Research, Inc.
  2. Yoshifumi Konishi & Nori Tarui, 2013. "Intra-Industry Reallocations and Long-run Impacts of Environmental Regulations," Working Papers 201307, University of Hawaii at Manoa, Department of Economics.
  3. C. Lanier Benkard & Przemyslaw Jeziorski & Gabriel Y. Weintraub, 2013. "Oblivious Equilibrium for Concentrated Industries," NBER Working Papers 19307, National Bureau of Economic Research, Inc.
  4. Evangelina Dardati, 2013. "Pollution Permit Systems and Firm Dynamics: Does the Allocation Scheme Matter?," ILADES-Georgetown University Working Papers inv294, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines.
  5. Konishi, Yoshifumi & Tarui, Nori, 2014. "Emissions Trading, Firm Heterogeneity, and Intra-Industry Reallocations in the Long Run," CEI Working Paper Series 2014-1, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.

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