Firms’ Supply Chain Adaptation to Carbon Taxes

Pierre Coster, Julian di Giovanni and Isabelle Méjean ()
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Isabelle Méjean: https://www.sciencespo.fr/department-economics/researcher/isabelle-mejean.html

No 1136, Staff Reports from Federal Reserve Bank of New York

Abstract: This paper studies how firms adjust input sourcing in response to climate policy. Using the EU Emissions Trading System (ETS) as a natural experiment and French product-level import and production data, we show that firms increasingly shifted imports of ETS-regulated inputs to non-EU countries over the 2010s as the policy became more stringent, indicating carbon leakage. This leakage is economically significant: the share of ETS-regulated products sourced from outside the EU rose by 4.3 percentage points after the ETS was implemented. Motivated by these empirical findings, we estimate a heterogeneous firm model using pre-ETS data. Simulating the model under a €100 carbon tax reproduces observed leakage, raises domestic prices, and modestly reduces French emissions. Adding a carbon tariff similar to the EU's Carbon Border Adjustment Mechanism (CBAM) reverses the leakage but further increases prices. The combined ETS+CBAM regime is seven times more effective than the ETS alone in reducing emissions.

Keywords: firm sourcing; supply chain adaptation; carbon tax; carbon tariffs; carbon leakage (search for similar items in EconPapers)
JEL-codes: F14 F18 F64 H23 Q56 (search for similar items in EconPapers)
Pages: 81
Date: 2024-11-01
New Economics Papers: this item is included in nep-eec, nep-ene, nep-env, nep-int, nep-pbe and nep-pub
Note: Revised November 2025.
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DOI: 10.59576/sr.1136

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