Discussion papers are research materials circulated by their authors for purposes of information and discussion. They have not necessarily undergone formal peer review.
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 CO 2 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 nonpolicy 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.
While economists generally agree that trade liberalization can be an important driver of economic growth, there is concern that increased trade can have negative impacts on the environment. One alternative is to coordinate trade liberalization with corrective environmental policies. A growing body of research, however, has shown that environmental policies may involve previously unrecognized welfare costs due to their interaction with pre-existing distortions in the economy. We augment the GTAP data base with data on taxes and labor market distortions and develop a global CGE model which accounts for tax interaction and revenue recycling effects. We explore a number of options for coordinated trade and environmental policy and find that accounting for second best effects can significantly alter the results. We show that coordinated trade and environmental reform could potentially be used to help break the current impasse between developed and developing countries over international climate policy.
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