Paper Number: 2012-03
Document Date: 05/2012
Author(s): Liwayway Adkins, Richard Garbaccio, Mun Ho, Eric Moore and Richard Morgenstern
Subject Area(s): Economic Impacts; Modeling
JEL Classification: Trade: Empirical Studies of Trade; Production and Organizations: Firm Behavior: Theory; General Equilibrium and Disequilibrium: Input–Output Tables and Analysis; Computable and Other Applied General Equilibrium Models; Taxation; Subsidies and Revenue: Externalities; Redistributive Effects; Environmental Taxes and Subsidies
Keywords: carbon price; competitiveness; input-output analysis; computable general equilibrium models; output-based allocations; carbon leakage
Abstract: 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 offsetting policies to compensate losers and the number of countries implementing comparable policies. We examine the effects of a $15/ton CO2 price, including Waxman-Markey-type allocations, on a disaggregated set of 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 energy-intensive trade-exposed (EITE) industries will be substantial. When output prices can rise to reflect higher energy costs, the reduction in profits is substantially smaller, and the offsetting policies in H.R. 2454 reduce output and profit losses even more. Over the medium- and long-terms, however, when more adjustments occur, the impact on output is more varied due to general equilibrium effects. We find that the use of the output-based rebates and other allocations in H.R. 2454 can substantially offset the output losses over all four time frames considered. Trade or "competitiveness" effects from the carbon price explain a significant portion of the fall in output for EITE sectors, but in absolute terms the trade impacts are modest and can be reduced or even reversed with the subsidies. The subsidies are less effective, however, in preventing emissions leakage to countries not adopting carbon policies. Roughly half of U.S. trade-related leakage to non-policy countries can be explained by changes in the volume of trade and the other half by higher emissions intensities induced by lower world fuel prices.
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