The Impact on U.S. Industries of Carbon Prices with Output-Based Rebates over Multiple Time Frames

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 the number of countries implementing the policy as well as offsetting policies to compensate losers. We examine the effects of a $15/ton CO2 price, including Waxman-Markey-type allocations to vulnerable 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 industries will indeed be large. When output prices can rise to reflect higher energy costs, the reduction in output and profits is substantially smaller. Over the medium- and long-terms, however, when more adjustments occur, the impact on output is more varied due to general equilibrium effects. The use of the H.R. 2454 rebates can substantially offset the output losses over all four time frames considered. We also consider competitiveness and leakage effects—changes in trade flows and changes in emissions in the rest of the world. We examine two measures of leakage: “trade-related” leakage that accounts for both the increased volume of net imports into the U.S. as well as the higher carbon intensity of these imports, and a broader leakage measure that includes the effect of increased fossil fuel consumption in countries not undertaking a carbon-pricing policy.