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Capacity decisions with demand fluctuations and carbon leakage

Author

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  • Guy Meunier

    (Department of Economics, Ecole Polytechnique - X - École polytechnique - CNRS - Centre National de la Recherche Scientifique, INRA-AliSS - UR 1303)

  • Jean-Pierre Ponssard

    (Department of Economics, Ecole Polytechnique - X - École polytechnique - CNRS - Centre National de la Recherche Scientifique)

Abstract

For carbon-intensive, internationally-traded industrial goods, a unilateral increase in the domestic CO2 price may result in the reduction of the domestic production but an increase of imports. In such sectors as electricity, cement or steel, the trade ows result more from short-term regional disequilibria between supply and demand than from international competition. This paper formalizes this empirical observation and characterizes its impact on leakage. Domestic fi rms invest in home plants under uncertainty; then, as uncertainty unfolds, they may source the home market from their home plants or from imports. We prove that there would be no leakage in the short-term (without capacity adaptation) but there would be in the long-term (with capacity adaption). Furthermore, the larger the uncertainty the larger the leakage is. We also characterize the impacts of uncertainty on the (short-term and long-term) pass-through rates. In the concluding section we discuss the implications of these results for the evaluation of climate policies.

Suggested Citation

  • Guy Meunier & Jean-Pierre Ponssard, 2013. "Capacity decisions with demand fluctuations and carbon leakage," Working Papers hal-00347650, HAL.
  • Handle: RePEc:hal:wpaper:hal-00347650
    Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-00347650v3
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    References listed on IDEAS

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    1. repec:spr:annopr:v:255:y:2017:i:1:d:10.1007_s10479-016-2246-9 is not listed on IDEAS
    2. Meunier, Guy & Ponssard, Jean-Pierre & Quirion, Philippe, 2014. "Carbon leakage and capacity-based allocations: Is the EU right?," Journal of Environmental Economics and Management, Elsevier, vol. 68(2), pages 262-279.
    3. Frédéric Branger & Jean-Pierre Ponssard & Oliver Sartor & Misato Sato, 2015. "EU ETS, Free Allocations, and Activity Level Thresholds: The Devil Lies in the Details," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 2(3), pages 401-437.
    4. Elisabetta Allevi & Giorgia Oggioni & Rossana Riccardi & Marco Rocco, 2013. "A spatial competitive analysis: the carbon leakage effect on the cement industry under the European Emissions Trading Scheme," Temi di discussione (Economic working papers) 899, Bank of Italy, Economic Research and International Relations Area.
    5. Guy Meunier & Jean-Pierre Ponssard & Philippe Quirion, 2014. "Carbon Leakage and Capacity-Based Allocations. Is the EU right?," Working Papers hal-00672907, HAL.
    6. Gregory Cook & Jean-Pierre Ponssard, 2011. "A proposal for the renewal of sectoral approaches building on the Cement Sustainability Initiative," Climate Policy, Taylor & Francis Journals, vol. 11(5), pages 1246-1256, September.
    7. Frédéric Branger & Jean-Pierre Ponssard & Oliver Sartor & Misato Sato, 2014. "EU ETS, Free Allocations and Activity Level Thresholds. The devil lies in the details," Working Papers hal-01072736, HAL.
    8. repec:eee:ejores:v:264:y:2018:i:2:p:717-731 is not listed on IDEAS
    9. Jean-Pierre Ponssard & Catherine Thomas, 2010. "Capacity Investment under Demand Uncertainty. An Empirical Study of the US Cement Industry, 1994-2006," CESifo Working Paper Series 3166, CESifo Group Munich.
    10. Justin Leroux & Daniel Spiro, 2017. "Leading the Unwilling: Unilateral Strategies to Prevent Arctic Oil Exploration," CESifo Working Paper Series 6629, CESifo Group Munich.
    11. repec:spr:annopr:v:255:y:2017:i:1:d:10.1007_s10479-016-2200-x is not listed on IDEAS

    More about this item

    Keywords

    capacity decisions; carbon leakage; demand fluctuations; capacity decisions.;

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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