Working Paper: NBER ID: w26629
Authors: Brendan J. Casey; Wayne B. Gray; Joshua Linn; Richard Morgenstern
Abstract: Pricing carbon emissions from a jurisdiction could harm the competitiveness of local firms, causing the leakage of emissions and economic activity to other regions. Past research concentrated on national carbon prices, but the impacts of subnational carbon prices could be more severe due to the openness of regional economies. Focusing on subnational carbon pricing in the United States, we specify a flexible model to capture competition between a plant in a state with carbon pricing and plants in other states or countries. We estimate model parameters using confidential plant-level data from 1982–2011 and simulate the effects of regional carbon prices covering the Northeast and Mid-Atlantic (regions that currently cap carbon emissions from the electric sector) on manufacturing output, employment, and profits. Importantly, we model industry mix within a state or region, not simply energy price differences. A carbon price of $10 per metric ton reduces employment in the regulated region by 2.7 percent, and raises employment in nearby states by 0.8 percent; the effects on output and profits are broadly similar. National employment falls just 0.1 percent, suggesting that domestic plants in other states as opposed to foreign facilities are the principal winners from state or regional carbon pricing.
Keywords: Carbon Pricing; Industrial Competitiveness; Emissions Leakage
JEL Codes: Q4; Q52; Q58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| carbon pricing (Q58) | employment in regulated region (K23) |
| carbon pricing (Q58) | employment in neighboring states (J69) |
| employment in regulated region (K23) | competitiveness of firms in neighboring states (L19) |
| carbon pricing (Q58) | output in regulated region (L59) |
| carbon pricing (Q58) | profits in regulated region (L51) |
| employment in neighboring states (J69) | economic activity leakage from regulated states (H79) |
| national employment effect (J68) | carbon pricing (Q58) |