Employment and Output Leakage Under California's Cap-and-Trade Program

Resources for the Future Discussion Paper 16-17

55 Pages Posted: 3 Jun 2016

See all articles by Wayne B. Gray

Wayne B. Gray

Clark University - Department of Economics; National Bureau of Economic Research (NBER)

Joshua Linn

Resources for the Future

Richard D. Morgenstern

Resources for the Future

Date Written: May 13, 2016

Abstract

To estimate the potential impact of California’s cap-and-trade program on the state’s energy-intensive, trade-exposed manufacturing industries, this paper uses confidential plant-level Census data to model the effect of historical energy prices on plant-level output, employment, and value added, both inside and outside California, holding constant foreign energy prices. Simulation of the model for an assumed compliance cost of $10 per metric ton of carbon dioxide equivalent (CO2) in California and zero outside the state yields 0 to 3 percent short-term (one year) impacts for almost a third of the industries studied with no output-based rebating. The largest losses are estimated in glass container manufacturing (17 percent), paperboard mills (14 percent), automobile manufacturing (13 percent), iron and steel mills and ferroalloy manufacturing (12 percent), and poultry processing (11 percent); these industries are among the most energy intensive of those studied. Estimated losses for another group of five industries are about 10 percent. These losses should be compared to an overall average one year loss of about 5.7 percent across all the California energy-intensive, trade-exposed industries studied. Simulations of higher compliance costs (up to $22 per metric ton of CO2) result in correspondingly larger losses. Over the long run, defined as a five-year period, the results suggest that increases in California's energy prices relative to those in nearby states have smaller effects than those effects seen over 1 year. Over this longer period, the largest output losses are below 1 percent, with most industries experiencing output losses below 0.1 percent, although for a variety of technical reasons the authors offer caution when interpreting the industry-specific long-run results.

Keywords: Carbon Price, Competitiveness, Leakage

JEL Classification: D21, H23, J23

Suggested Citation

Gray, Wayne B. and Linn, Joshua and Morgenstern, Richard D., Employment and Output Leakage Under California's Cap-and-Trade Program (May 13, 2016). Resources for the Future Discussion Paper 16-17, Available at SSRN: https://ssrn.com/abstract=2789820 or http://dx.doi.org/10.2139/ssrn.2789820

Wayne B. Gray (Contact Author)

Clark University - Department of Economics ( email )

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Joshua Linn

Resources for the Future ( email )

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Richard D. Morgenstern

Resources for the Future ( email )

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