Working Paper: NBER ID: w18645
Authors: Meredith Fowlie; Mar Reguant; Stephen P. Ryan
Abstract: We assess the long-run dynamic implications of market-based regulation of carbon dioxide emissions in the US Portland cement industry. We consider several alternative policy designs, including mechanisms that use production subsidies to partially offset compliance costs and border tax adjustments to penalize emissions associated with foreign imports. Our results highlight two general countervailing market distortions. First, following Buchanan (1969), reductions in product market surplus and allocative inefficiencies due to market power in the domestic cement market counteract the social benefits of carbon abatement. Second, trade exposure to unregulated foreign competitors leads to emissions "leakage" which offsets domestic emissions reductions. Taken together, these forces result in social welfare losses under policy regimes that fully internalize the emissions externality. In contrast, market-based policies that incorporate design features to mitigate the exercise of market power and emissions leakage can deliver welfare gains.
Keywords: market-based regulation; emissions leakage; production subsidies; border tax adjustments
JEL Codes: L5; Q5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| market power in the domestic cement market (L74) | reductions in product market surplus (L11) |
| reductions in product market surplus (L11) | social welfare losses (H53) |
| market power in the domestic cement market (L74) | allocative inefficiencies (D61) |
| allocative inefficiencies (D61) | social welfare losses (H53) |
| trade exposure to unregulated foreign competitors (F69) | emissions leakage (F64) |
| emissions leakage (F64) | social welfare losses (H53) |
| policies incorporating features to mitigate market power and emissions leakage (Q58) | welfare gains (D69) |
| traditional regulatory approaches (L51) | social welfare losses (H53) |
| high compliance costs under auction-carbon tax scenarios (Q52) | disinvestment (L33) |
| disinvestment (L33) | exacerbated market power issues (D43) |