Industry-level Impacts of Carbon
Taxes Over Multiple Time Horizons
Richard D. Morgenstern
Fiscal Reform and Climate Protection:
Considering a U.S. Carbon Tax
October 18, 2011
Competitiveness and carbon taxes
• Carbon pricing will increase costs, affecting industry
output, employment, and profits
• Likely result in emissions leakage as well
• BTU tax (1993), loosely tied to energy intensive trade
exposed (EITE) metrics, exempted entire industries
• Recent carbon tax literature not focused on
competitiveness ; in contrast, cap and trade analyses
emphasize need to incentivize carbon efficiency and
maintaining output
• H.R. 2454 (2009) adopts output based rebates for EITE
industries plus petroleum refining
Methods for estimating policy
impacts
• ‘bottom-up’ models contain technology detail for
narrowly defined industries, but do not explain
prices/quantities as part of whole economy
• ‘top-down’ CGE models cover the whole
economy, or even the world, and determine prices
and quantities endogenously, but often do not have
detailed industries.
• Short-run and long-run effects often not clearly
distinguished.
Recent Modeling Studies
Fischer and Fox (2007, 2009), and U.S. Interagency Report
(2009) focus on long run CGE analysis
Adkins et. al. (2010) examine four time horizons:
•
Very Short Run: All input quantities fixed, output price
fixed.
•
Short Run: Higher prices reduce sales and output but no
input substitution
•
Medium Term: CGE analysis; input substitution allowed
but industry capital fixed
•
Long run : GGE Analysis; reallocation of capital allowed
Identification of Hardest Hit
Industries
• Readily identifiable set of industries at
greatest risk of output losses:
Petroleum refining
Chemicals and plastics
Ferrous metals
Nonferrous metals
Nonmetallic mineral products
• Impacts vary over different timeframes
10%
Coal Mining
Other Mining Activities
Electric Utilities (inc govt enterprises)
Gas Utilities
Construction
Trade
Air Transportation
Truck Transportation
Other Transportation
Information
Finance and Insurance
Real Estate and Rental
Business Services
Other Services
Govt exc. Electricity
Miscellaneous Manufacturing
Farms
Forestry, Fishing, etc
Oil Mining
Gas Mining
Machinery
Computer & Electrical Equipment
Motor Vehicles
Other Transportation Equipment
Alumina Refining, Primary & Secondary Aluminum
Ferrous Metal Foundries
Non-Ferrous Metal Foundries
Other Primary Metals
Fabricated Metals
Plastics and Material Resins
Artificial & Synthetic Fibers, Filaments
Fertilizers
Other Chemical & Plastics
Glass Containers
Cement
Lime and Gypsum
Mineral Wool
Other Nonmetallic Mineral
Iron and Steel Mills and Ferroalloy
Pulp Mills
Paper Mills
Paperboard Mills
Other Papers
Refining-LPG
Refining-Other
Petrochemical Manufacturing
Basic Inorganic Chemical Mfg
Other Basic Organic Chemical Mfg
Food
Textile
Apparel
Wood & Furniture
Change in Profits
Ability to Raise Prices Key to
Maintaining Profitability
-90%
-80%
-70%
-60%
-50%
-40%
-30%
-20%
Very-short-run (fixed output)
-10%
Short-Run
0%
Adverse Impacts Concentrated in
Narrowly Defined Industries
• Greatest harm concentrated in segments of
three digit manufacturing industries (NAICS):
Other basic chemicals
Aluminum
Petrochemicals
Artificial fibers
Plastics and resins
• Some industries, mostly nonmanufacturing,
gain slightly as expenditures switch away from
carbon intensive sectors
Impacts on Output Vary Over Time
($15/Ton Tax, no Rebates)
-1.2
% Change in Output
-1
-0.8
-0.6
Short-Run
Medium-Run
Long-Run
-0.4
-0.2
0
Average for all EITE Industries (including Petroleum)
Impact on Output for key EITE Industries
($15/Ton Tax, without Rebates)
-3.50
-3.00
% Change in Output
-2.50
-2.00
-1.50
Short-Run No Rebates
Medium-Run No Rebates
Long-Run No Rebates
-1.00
-0.50
0.00
0.50
Food,
Textiles
Beverages, and
Tobacco
Wood
Ferrous MetalsNonferrous
Paper and Petroleum and Chemicals, Non-Metallic
primary metals
Publishing Coal ProductsRubber, and Mineral
Plastics
Products
Output Based Rebates for H.R. 2454
8.3
3.1
0.0
15.9
405.2
Subsidy rate (% of
output)
0.001%
0.005%
0.010%
0.157%
Qualifying share of
output (%)
1.4%
1.6%
0.0%
4.1%
21.5%
32.0
0.771%
100.0%
Amount (mil $)
Food, Beverages, and Tobacco
Textiles
Wearing Apparel and Leather
Wood
Paper and Publishing
- Pulp mills
- Paper mills
Petroleum and Coal Products
- Refining-lpg
- Refining-other
Chemicals, Rubber, and Plastics
- Petrochemical manufacturing
- Basic Inorganic Chemical Mfg
- Other Basic Organic Chemical Mfg
- Artificial and Synthetic Fibers and Filaments
- Fertilizers
- Other Chemical & Plastics
Non-Metallic Mineral Products
- Glass containers
- Cement
- Lime and Gypsum
- Mineral Wool
- Other Nonmetallic Mineral
Ferrous Metals
- Iron and Steel Mills and Ferroalloy
Nonferrous primary metals
- Alumina Refining, etc.
- Other Primary Metals
Electric Utilities
Gas manuf. and distribution
373.2
0.727%
100.0%
2,019.9
0.422%
100.0%
114.1
0.422%
100.0%
1,905.8
0.422%
100.0%
1,765.3
0.241%
30.7%
644.8
1.226%
100.0%
150.0
0.584%
100.0%
763.2
1.022%
100.0%
67.7
0.796%
100.0%
62.8
0.568%
32.4%
76.7
0.016%
12.4%
584.8
0.489%
33.2%
29.8
0.678%
100.0%
451.5
4.381%
100.0%
35.4
0.396%
18.5%
26.5
0.412%
100.0%
41.6
0.046%
18.9%
905.4
0.876%
80.6%
905.4
1.087%
100.0%
151.3
0.185%
39.5%
135.5
0.591%
100.0%
15.8
0.034%
20.3%
26,933.0
8,079.8
7.234%
7.005%
-
Output Based Rebates Quite Effective in
Mitigating Adverse Impacts
-1.2
% Change in Output
-1
-0.8
-0.6
without Rebates
with Rebates
-0.4
-0.2
0
SR
MR
LR
Average for all EITE Industries Plus Petroleum
Impact on Output for EITE Industries
Plus Petroleum
($15/Ton Tax, with and without Rebates)
-3.50
-3.00
-2.50
% Change in Output
-2.00
-1.50
Short-Run No Rebates
Short-Run Rebates
-1.00
Medium-Run No Rebates
Medium-Run Rebates
-0.50
Long-Run No Rebates
Long-Run Rebates
0.00
0.50
1.00
1.50
Food,
Textiles
Beverages, and
Tobacco
Wood
Ferrous MetalsNonferrous
Paper and Petroleum and Chemicals, Non-Metallic
primary metals
Publishing Coal ProductsRubber, and Mineral
Products
Plastics
International Trade
• While changes in output resulting from
domestic carbon pricing reflect changes in
U.S. industrial activity, they do not
necessarily reflect changes in consumption
• To understand impacts on consumption, one
needs to consider changes in exports and
imports
Trade Impacts of $15/ton CO2 price (% changes)
14
Trade Impacts of $15/ton CO2 price (% changes)
15
Emissions Leakage, Multilateral
Action
• Emissions leakage arises from trade effects
and fuel price driven emission intensity
changes in non-policy nations
• Fischer and Fox, and Adkins et al. find the
latter to be larger than the former
• In sensitivity analysis, we calculate the
importance of multilateral action: with only
unilateral carbon pricing, EITE output
losses almost twice those reported here
Output Based Rebates in a Carbon
Tax Regime
• Output based rebates incentivize (downstream)
output while maintaining carbon efficiency
incentives created by carbon pricing (upstream)
• Despite economic costs, clear political economy
gains of the rebates
• To mimic the incentives of output based rebates in
an (upstream) carbon tax regime, downstream
refundable tax credits needed for EITE industries
• Design of such tax credits probably straightforward,
except for risk of overcompensation in the case of
unexpected innovation that reduces mitigation costs
Conclusions
• Competitiveness impacts of carbon pricing
non trivial
• Fortunately, studies from cap and trade
literature have considered impacts and
potential remedies
• Field is quite open to better targeting
rebates
• Carbon tax analyses need to build on such
studies and incorporate/expand policy
approaches
Thank you