On the effects of unilateral environmental policy on offshoring in multi‐stage production processes

Abstract

We extend the literature on global supply chains by analyzing if and how unilateral environmental regulation induces offshoring. We develop an analytical model of two‐stage production processes that can be distributed between two countries and investigate unilateral emission pricing and its supplementation with border carbon taxes. In contrast to existing final good models, we are able to show how impacts of regulation differ across the different stages of the supply chain, depending on the interplay of comparative advantages and general equilibrium effects. To get a more comprehensive picture, we subsequently apply a computable general equilibrium model that includes a representation of international supply chains. We find heterogeneous but mostly positive effects of a unilateral carbon emission reduction by the European Union on the degree of vertical specialization of European industries. Border taxes are successful in protecting upstream industries, but with negative side effects for downstream industries.

Reducing global CO 2 emissions with the technologies we have

“…A serious limitation of these approaches is that these estimations do not take account of the energy, raw materials (including chemicals) and technology inputs that are required up-or b This translates into approximately 32.5 exajoules c The same method was applied by Kim and Kim (2012)when estimating the potential for the relative improvement of the carbon intensity of production sectors. downstream of the supply chain of a given production sector (Schenker et al, 2014). In this paper we argue that methods for estimating emission reduction potentials through technology exchange that focus solely on sectoral energy or carbon intensities overlook important constraints-and that this omission leads to missing out on relevant reduction potentials.…”

“…The linear optimization framework we apply allows to simultaneously exchange multiple interacting sectoral technologies e . Our approach differs from standard analyses using computable general equilibrium (CGE) modeling, applied regularly for evaluating comparable settings (e.g., Lu et al, 2010 andSchenker et al, 2014). Generally, CGE models use nested production functions with constant elasticities of substitution Löschel et al, 2007), which are solved by optimizing this nested production structure (see Zha and Zhou (2014), Schenker (2014) and Alexeeva-Talebi (2012) for examples).…”

“…Our approach differs from standard analyses using computable general equilibrium (CGE) modeling, applied regularly for evaluating comparable settings (e.g., Lu et al, 2010 andSchenker et al, 2014). Generally, CGE models use nested production functions with constant elasticities of substitution Löschel et al, 2007), which are solved by optimizing this nested production structure (see Zha and Zhou (2014), Schenker (2014) and Alexeeva-Talebi (2012) for examples). Determining the (optimal) nested production structure (structure of elasticities), which has an influence on the results, see Zha and Zhou (2014), can be challenging when considering large amounts of inputs, as it is the case for our analysis f .…”

What drives total real unit energy costs globally? A novel LMDI decomposition approach

“…Even though (total) RUEC are regarded as indicators of energy cost competitiveness, an in-depth analysis of the impact of energy costs on industrial competitiveness should take (true) cost pass-through rates and other relevant factors (e.g., labour costs, infrastructure, and human capital) into account. In this regard, e.g., Schenker et al [2018] show that unilateral environmental regulation can have effects on multi-stage production structures of industries (i.e., global value chains).…”

Border Carbon Adjustments Based on Avoided Emissions: Addressing the Challenge of Its Design

“…There are two general approaches to define the tax base of a BCA. The first option takes as a reference the non-abating regions -the origin or place of production of the imported good-and it is based on the total emissions embodied in the good produced in the foreign country (Matto et al, 2009(Matto et al, , 2013bAtkinson et al, 2011;Dissou and Eyland, 2011;Böhringer et al, 2012;Ghosh et al, 2012;Elliott et al, 2013;Schenker et al, 2013). In the second option, conversely, the reference is the abating region -the place of destination or consumption of the imported goodand it is based on the total emissions embodied in the good if it were produced in the importing country (Matto et al, 2009(Matto et al, , 2013bBöhringer et al, 2012;Elliott et al, 2013).…”