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Climate Policy and Trade

Paper Session

Friday, Jan. 5, 2018 8:00 AM - 10:00 AM

Marriott Philadelphia Downtown, Grand Ballroom Salon E
Hosted By: American Economic Association
  • Chair: Mar Reguant, Northwestern University

Measuring Leakage Risk

Meredith Fowlie
,
University of California-Berkeley
Mar Reguant
,
Northwestern University

Abstract

The global nature of the climate change problem creates challenges for regional climate change policy. When a policy regulating greenhouse gas emissions applies to only a subset of emitting firms (i.e. the policy is “incomplete”), regulated sources can find it difficult to compete with firms in less regulated jurisdictions. A policy-induced shift in economic activity to less regulated jurisdictions can substantially undermine policy effectiveness via emissions “leakage”. Concerns about leakage loom large in the debate about how to design and implement regional policy responses to the global climate change problem.
Economists generally agree that, in a world of incomplete carbon regulation, full auctioning of permits, together with some form of border tax adjustment, would be the preferred approach to mitigating emissions leakage. For several reasons, however, this approach has been difficult to implement in practice. Thus, economists have been exploring what amounts to the next-best option: output-based rebating (e.g. Fischer and Fox 2007, Fowlie et al 2015, Quirion 2009, Fischer and Fox 2012, Meunier et al 2012). The basic idea involves off- setting potentially adverse competitiveness impacts of climate policy with a production-based subsidy. In the case of a tax the subsidy comes out of tax revenues. In the case of an emissions trading program, the subsidy can be paid in terms of free emissions permits.
Although output-based rebating can effectively mitigate leakage, these provisions come at a cost. In light of these costs and limitations, it is important to carefully target leakage mitigation measures and associated compensation to industries truly at leakage risk. The metrics currently used to identify eligible industries are somewhat ad hoc. These metrics provide a very useful point of departure.

How Trade-sensitive are Energy-intensive Sectors?

Carolyn Fischer
,
Resources for the Future
Alan Fox
,
U.S. International Trade Commission

Abstract

For most governments looking to implement climate policy—and for the interest groups looking to influence it—the effect of unilateral greenhouse gas (GHG) regulation on “competitiveness” represents an overarching concern: will the policy cause jobs, production, and emissions to move abroad? Critical to improving the analysis of climate policy implications for energy-intensive, trade-exposed (EITE) sectors are better empirical estimates of trade sensitivities. A small literature has drawn on recent experience ex post to evaluate competitiveness effects of carbon pricing (Dechezlepretre and Sato, forthcoming in REEP); however, such empirical estimates are challenged by the fact that energy price differentials tend to be small compared to those of other determinants of trade (e.g., infrastructure, geography, and availability of raw materials and skilled labor), and extrapolations are limited by a lack of experience with carbon pricing at levels and for durations that would actually engender leakage. Thus, ex ante analysis of climate policy and carbon leakage relies heavily on computable general equilibrium (CGE) models of global trade (Fischer and Fox 2011). Yet most trade models were designed with an emphasis on commodities important for trade negotiations rather than those important for climate policy, and thus lack critical details. We provide econometrically estimated parameters related to the trade sensitivity of energy-intensive sectors (and subsectors) to help identify sectors at risk for carbon leakage, to quantify the impacts, and to evaluate policy alternatives for addressing these problems.

Regulating Mismeasured Pollution: Implications of Firm Heterogeneity for Environmental Policy

Eva Lyubich
,
University of California-Berkeley
Joseph Shapiro
,
Yale University
Reed Walker
,
University of California-Berkeley

Abstract

This paper quantifies within-industry heterogeneity in greenhouse gas emissions per unit of output by using the most detailed data available on the entire U.S. manufacturing sector. We show that heterogeneity in emissions intensities is substantial, even within narrowly-defined industries that produce homogeneous products. We then discuss the implications of this heterogeneity for the efficiency of industry-wide greenhouse gas regulations, such as carbon tariffs that are designed to prevent “leakage” of emissions from countries with climate change regulations to those without.
Discussant(s)
Matilde Bombardini
,
University of British Columbia
Teresa Fort
,
Dartmouth College
Thibault Fally
,
University of California-Berkeley
JEL Classifications
  • F1 - Trade