Capacity Decisions with Demand Fluctuations and Carbon Leakage

Guy Meunier and Jean-Pierre Ponssard

No 4627, CESifo Working Paper Series from CESifo

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 or 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 leakage. Domestic firms invest in home plants under uncertainty; then, as uncertainty unfolds, they may source the home market from their home plants or from imports. We prove that there would be no leakage in the short-term (without capacity adaptation) but there would be in the long-term (with capacity adaption). Furthermore, the larger the uncertainty the larger the leakage is. We also characterize the impacts of uncertainty on the (short-term and long-term) pass-through rates. 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: Add references at CitEc
Citations: View citations in EconPapers (13)

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Related works:
Journal Article: 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:ces:ceswps:_4627

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