Market-Based Emissions Regulation and Industry Dynamics

51 Pages Posted: 22 Dec 2012

See all articles by Meredith Fowlie

Meredith Fowlie

University of California, Berkeley

Mar Reguant

Northwestern University - Department of Economics

Stephen Ryan

University of Texas at Austin - Department of Economics

Date Written: December 2012

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.

Suggested Citation

Fowlie, Meredith and Reguant, Mar and Ryan, Stephen, Market-Based Emissions Regulation and Industry Dynamics (December 2012). NBER Working Paper No. w18645. Available at SSRN: https://ssrn.com/abstract=2192818

Meredith Fowlie (Contact Author)

University of California, Berkeley ( email )

310 Barrows Hall
Berkeley, CA 94720
United States

Mar Reguant

Northwestern University - Department of Economics ( email )

2001 Sheridan Rd
Evanston, IL 60208
United States

Stephen Ryan

University of Texas at Austin - Department of Economics ( email )

Austin, TX 78712
United States

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