Capacity decisions with demand fluctuations and carbon leakage

Guy Meunier and Jean-Pierre Ponssard

Resource and Energy Economics, 2014, vol. 36, issue 2, 436-454

Abstract: For carbon-intensive, internationally-traded industrial goods, a unilateral increase in the domestic CO2 price may result in the reduction of the domestic production but an increase of imports. In such sectors as electricity, cement and steel, the trade flows result more from short-term regional disequilibria between supply and demand than from international competition. This paper formalizes this empirical observation and characterizes its impact on carbon leakage. Domestic firms invest in domestic plants under uncertain domestic demand conditions; then, as uncertainty unfolds, they may supply the domestic market from their domestic plants or from imports. We prove that there would be no leakage in the short term (without capacity adjustment) but that there would be in the long term (with capacity adjustment). Furthermore the larger the uncertainty, the larger the leakage. We also characterize the impact of uncertainty on the (short and long term) pass-through rates of the carbon price. In the concluding section we discuss the implications of these results for the evaluation of climate policies.

Keywords: Carbon leakage; Demand fluctuations; Capacity decisions (search for similar items in EconPapers)
JEL-codes: D81 D92 L13 Q56 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

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Related works:
Working Paper: Capacity Decisions with Demand Fluctuations and Carbon Leakage (2014)
Working Paper: Capacity decisions with demand fluctuations and carbon leakage (2014)
Working Paper: Capacity decisions with demand fluctuations and carbon leakage (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:resene:v:36:y:2014:i:2:p:436-454

DOI: 10.1016/j.reseneeco.2014.01.005

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