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Carbon leakage under incomplete environmental regulation: An industry-level approach

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  • Robert A. Ritz
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    Abstract

    Carbon leakage is a major concern for policymakers involved with environmental initiatives such as the European Union's emissions trading scheme and similar cap-and-trade proposals in the United States, Australia, and elsewhere.� This paper provides a framework for understanding the drives underlying carbon leakage at the level of an individual sector in which only a subset of firms is covered by such regulation.� It provides simple formulae to estimate leakage rates using information on industry characteristics that is typically available to the analyst.� Illustrative estimates for the steel industry in the EU ETS suggest carbon leakage of 25-30% or (much) higher - unless environmental-efficiency improvements by regulated firms are substantial.

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    Bibliographic Info

    Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 461.

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    Date of creation: 01 Nov 2009
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    Handle: RePEc:oxf:wpaper:461

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    Related research

    Keywords: Abatement; Cap-and-trade; Carbon tax; Cost pass-through; Emissions trading; Free allocation; Market structure;

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    1. Richard A. Lord & W. Ken Farr, 2003. "Collusion and Financial Leverage: An Analysis of the Integrated Mill Steel Industry," Financial Management, Financial Management Association, Financial Management Association, vol. 32(1), Spring.
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    5. Hepburn, Cameron J. & Quah, John K.-H. & Ritz, Robert A., 2013. "Emissions trading with profit-neutral permit allocations," Journal of Public Economics, Elsevier, Elsevier, vol. 98(C), pages 85-99.
    6. Sharon Oster, 1982. "The Diffusion of Innovation among Steel Firms: The Basic Oxygen Furnace," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 13(1), pages 45-56, Spring.
    7. Ghemawat, Pankaj, 1993. "Commitment to a Process Innovation: Nucor, USX, and Thin-Slab Casting," Journal of Economics & Management Strategy, Wiley Blackwell, Wiley Blackwell, vol. 2(1), pages 135-61, Spring.
    8. Bushnell, James & Wolfram, Catherine, 2008. "Electricity Markets," Staff General Research Papers, Iowa State University, Department of Economics 31547, Iowa State University, Department of Economics.
    9. Kim, Yeonbae & Worrell, Ernst, 2002. "International comparison of CO2 emission trends in the iron and steel industry," Energy Policy, Elsevier, Elsevier, vol. 30(10), pages 827-838, August.
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    11. Demailly, Damien & Quirion, Philippe, 2008. "European Emission Trading Scheme and competitiveness: A case study on the iron and steel industry," Energy Economics, Elsevier, Elsevier, vol. 30(4), pages 2009-2027, July.
    12. Paul Klemperer & A. Jorge Padilla, 1997. "Do Firms' Product Lines Include Too Many Varieties?," RAND Journal of Economics, The RAND Corporation, vol. 28(3), pages 472-488, Autumn.
    13. Hoel, Michael, 1991. "Global environmental problems: The effects of unilateral actions taken by one country," Journal of Environmental Economics and Management, Elsevier, vol. 20(1), pages 55-70, January.
    14. Meredith L. Fowlie, 2009. "Incomplete Environmental Regulation, Imperfect Competition, and Emissions Leakage," American Economic Journal: Economic Policy, American Economic Association, American Economic Association, vol. 1(2), pages 72-112, August.
    15. James A. Brander & Anming Zhang, 1990. "Market Conduct in the Airline Industry: An Empirical Investigation," RAND Journal of Economics, The RAND Corporation, vol. 21(4), pages 567-583, Winter.
    16. Hahn, Robert W., 1982. "Market Power and Transferable Property Rights," Working Papers, California Institute of Technology, Division of the Humanities and Social Sciences 402, California Institute of Technology, Division of the Humanities and Social Sciences.
    17. Babiker, Mustafa H., 2005. "Climate change policy, market structure, and carbon leakage," Journal of International Economics, Elsevier, Elsevier, vol. 65(2), pages 421-445, March.
    18. Ritz, Robert A., 2008. "Strategic incentives for market share," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 26(2), pages 586-597, March.
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    Cited by:
    1. Svetlana Batrakova, 2012. "Does industry concentration matter for pollution haven effects?," Grantham Research Institute on Climate Change and the Environment Working Papers, Grantham Research Institute on Climate Change and the Environment 90, Grantham Research Institute on Climate Change and the Environment.
    2. Gabriela Michalek & Reimund Schwarze, 2014. "Carbon Leakage: Pollution, Trade or Politics?," Discussion Paper Series RECAP15, RECAP15, European University Viadrina, Frankfurt (Oder) 12, RECAP15, European University Viadrina, Frankfurt (Oder).
    3. Robert w. Hahn & Robert A. Ritz, 2013. "Does the social Cost of Carbon Matter?: An Assessment of U.S. Policy," Cambridge Working Papers in Economics, Faculty of Economics, University of Cambridge 1346, Faculty of Economics, University of Cambridge.
    4. Ian Sheldon & Steve McCorriston, 2012. "Climate policy and border tax adjustments: Might industrial organization matter?," EconoQuantum, Revista de Economia y Negocios, Universidad de Guadalajara, Centro Universitario de Ciencias Economico Administrativas, Departamento de Metodos Cuantitativos y Maestria en Economia., vol. 9(2), pages 7-28, Julio-Dic.
    5. Dieter Helm & Cameron Hepburn & Giovanni Ruta, 2012. "Trade, climate change, and the political game theory of border carbon adjustments," Oxford Review of Economic Policy, Oxford University Press, Oxford University Press, vol. 28(2), pages 368-394, SUMMER.
    6. Robert Hahn & Robert Ritz, 2014. "Optimal Altruism in Public Good Provision," Cambridge Working Papers in Economics, Faculty of Economics, University of Cambridge 1403, Faculty of Economics, University of Cambridge.

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