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The Incidence of Carbon Taxes in U.S. Manufacturing: Lessons from Energy Cost Pass-through

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Abstract

This paper studies how changes in energy input costs for U.S. manufacturers affect the relative welfare of manufacturing producers and consumers (i.e., incidence). In doing so, we develop a novel partial equilibrium methodology designed to estimate the incidence of input taxes. This method simultaneously accounts for three determinants of incidence that are typically studied in isolation: incomplete pass-through of input costs, differences in industry competitiveness, and substitution amongst inputs used for production. We apply this methodology to a set of U.S. manufacturing industries for which we observe plant-level unit prices and input choices. We find that about 70 percent of energy price-driven changes in input costs are passed through to consumers. We combine industry-specific pass-through rates with estimates of industry competitiveness to show that the share of welfare cost borne by consumers is 25-75 percent smaller (and the share borne by producers is correspondingly larger) than models featuring complete pass-through and perfect competition would suggest.

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  • Sharat Ganapati & Joseph S. Shapiro & Reed Walker, 2016. "The Incidence of Carbon Taxes in U.S. Manufacturing: Lessons from Energy Cost Pass-through," Cowles Foundation Discussion Papers 2038R3, Cowles Foundation for Research in Economics, Yale University, revised Mar 2018.
  • Handle: RePEc:cwl:cwldpp:2038r3
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    Cited by:

    1. Christos Genakos & Felix Grey & Robert Ritz, 2020. "Generalized linear competition: From pass-through to policy," Working Papers EPRG2023, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.
    2. Brendan Casey & Wayne B. Gray & Joshua Linn & Richard D. Morgenstern, 2022. "How Does State-Level Carbon Pricing in the United States Affect Industrial Competitiveness?," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 83(3), pages 831-860, November.
    3. Sebastián Fleitas & Gautam Gowrisankaran & Anthony Lo Sasso, 2018. "Reclassification Risk in the Small Group Health Insurance Market," NBER Working Papers 24663, National Bureau of Economic Research, Inc.
    4. Takanori Adachi & Michal Fabinger, 2017. "Multi-Dimensional Pass-Through, Incidence, and the Welfare Burden of Taxation in Oligopoly," CIRJE F-Series CIRJE-F-1040, CIRJE, Faculty of Economics, University of Tokyo.
    5. Don Fullerton & Erich Muehlegger, 2019. "Who Bears the Economic Burdens of Environmental Regulations?," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 13(1), pages 62-82.
    6. Luong, Phat V. & Xu, Xiaowei, 2020. "Pass-through of commodity price shocks in distribution channels with risk-averse agents," International Journal of Production Economics, Elsevier, vol. 226(C).
    7. Elliott, Robert & Sun, Puyang & Zhu, Tong, 2019. "Electricity prices and industry switching: Evidence from Chinese manufacturing firms," Energy Economics, Elsevier, vol. 78(C), pages 567-588.
    8. Jonathan E. Hughes & Ian Lange, 2020. "Who (Else) Benefits From Electricity Deregulation? Coal Prices, Natural Gas, And Price Discrimination," Economic Inquiry, Western Economic Association International, vol. 58(3), pages 1053-1075, July.
    9. Duso, Tomaso & Szücs, Florian, 2017. "Market power and heterogeneous pass-through in German electricity retail," European Economic Review, Elsevier, vol. 98(C), pages 354-372.
    10. Leard, Benjamin & Linn, Joshua & Springel, Katalin, 2023. "Vehicle Attribute Tradeoffs and the Distributional Effects of US Fuel Economy and Greenhouse Gas Emissions Standards," RFF Working Paper Series 23-04, Resources for the Future.
    11. Leard, Benjamin & Linn, Joshua & Springel, Katalin, 2019. "Pass-Through and Welfare Effects of Regulations that Affect Product Attributes," RFF Working Paper Series 19-07, Resources for the Future.

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    More about this item

    Keywords

    Pass-through; incidence; energy prices; productivity; climate change;
    All these keywords.

    JEL classification:

    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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