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

Listed author(s):
  • Sharat Ganapati
  • Joseph S. Shapiro
  • Reed Walker

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 partial equilibrium methodology to estimate the incidence of input taxes that can simultaneously account for three determinants of incidence that are typically studied in isolation: incomplete pass-through of input costs, differences in industry competitiveness, and factor 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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 22281.

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Date of creation: May 2016
Handle: RePEc:nbr:nberwo:22281
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