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 CO2 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 non-policy 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.
Resources Magazine — Mar 22, 2013
Ensuring Competitiveness under a US Carbon Tax
As policymakers express renewed interest in a carbon tax, Carolyn Fischer, Richard Morgenstern, and Nathan Richardson weigh three options for preve...
Press Release — Jul 29, 2021
Nations Differ on Climate Policies—But What Does That Mean for International Trade?
To contend with the global web of national climate policies, new research from Resources for the Future (RFF) presents multiple policy options that could create fair trading conditions while incentivizing lower carbon emissions.
Issue Brief — Jul 14, 2021
Advanced Clean Energy Infrastructure: Effects of the Draft Energy Infrastructure Act
This issue brief examines the potential effects the Energy Infrastructure Act, proposed by West Virginia Senator Joe Manchin, on advanced clean energy technology and infrastructure.