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Carbon Pricing with Output-Based Subsidies: Impacts on U.S. Industries over Multiple Time Frames

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  • Liwayway Adkins
  • Richard Garbaccio
  • Mun Ho
  • Eric Moore
  • Richard Morgenstern

Abstract

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 offsetting policies to compensate losers and the number of countries implementing comparable policies. We examine the effects of a $15/ton CO2 price, including Waxman-Markey-type allocations, on a disaggregated set of 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 energy-intensive trade-exposed (EITE) industries will be substantial. When output prices can rise to reflect higher energy costs, the reduction in profits is substantially smaller, and the offsetting policies in H.R. 2454 reduce output and profit losses even more. Over the medium- and long-terms, however, when more adjustments occur, the impact on output is more varied due to general equilibrium effects. We find that the use of the output-based rebates and other allocations in H.R. 2454 can substantially offset the output losses over all four time frames considered. Trade or "competitiveness" effects from the carbon price explain a significant portion of the fall in output for EITE sectors, but in absolute terms the trade impacts are modest and can be reduced or even reversed with the subsidies. The subsidies are less effective, however, in preventing emissions leakage to countries not adopting carbon policies. Roughly half of U.S. trade-related leakage to non-policy countries can be explained by changes in the volume of trade and the other half by higher emissions intensities induced by lower world fuel prices.

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Bibliographic Info

Paper provided by National Center for Environmental Economics, U.S. Environmental Protection Agency in its series NCEE Working Paper Series with number 201203.

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Length: 43 pages
Date of creation: May 2012
Date of revision: May 2012
Handle: RePEc:nev:wpaper:wp201203

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Related research

Keywords: carbon price; competitiveness; input-output analysis; computable general equilibrium models; output-based allocations; carbon leakage;

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References

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  1. Aldy, Joseph Edgar & Pizer, William, 2011. "The Competitiveness Impacts of Climate Change Mitigation Policies," Scholarly Articles 5688779, Harvard Kennedy School of Government.
  2. Damien Demailly & Philippe Quirion, 2006. "CO2 abatement, competitiveness and leakage in the European cement industry under the EU ETS: Grandfathering vs. output-based allocation," Post-Print halshs-00639327, HAL.
  3. Ho, Mun S. & Morgenstern, Richard & Shih, Jhih-Shyang, 2008. "Impact of Carbon Price Policies on U.S. Industry," Discussion Papers dp-08-37, Resources For the Future.
  4. Morgenstern, Richard D. & Ho, Mun & Shih, J.-S.Jhih-Shyang & Zhang, Xuehua, 2004. "The near-term impacts of carbon mitigation policies on manufacturing industries," Energy Policy, Elsevier, vol. 32(16), pages 1825-1841, November.
  5. Carolyn Fischer & Alan K. Fox, 2007. "Output-Based Allocation of Emissions Permits for Mitigating Tax and Trade Interactions," Land Economics, University of Wisconsin Press, vol. 83(4), pages 575-599.
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Cited by:
  1. Sugino, Makoto & Arimura, Toshi H. & Morgenstern, Richard D., 2013. "The effects of alternative carbon mitigation policies on Japanese industries," Energy Policy, Elsevier, vol. 62(C), pages 1254-1267.

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