Balancing Production and Carbon Emissions with Fuel Substitution
Emmanuel Murray Leclair
MPRA Paper from University Library of Munich, Germany
Abstract:
The economic cost of carbon pricing depends on the ability and incentives of firms to switch towards cleaner fuels. Yet, many fundamental economic forces that drive firms' decisions to use different fuels are unobserved, causing significant uncertainty over the effectiveness of carbon policies. In this paper, I propose a new dynamic production model with multidimensional unobserved heterogeneity that underly technology differences and captures how firms' fuel choices respond to price changes. These differences cause heterogeneity in abatement costs, which generates heterogeneous responses to carbon pricing. Leveraging minimal assumptions about optimal input choice and the technology frontier, I quantify the model from a detailed panel of Indian steel establishments. Based on these estimates, implementing a carbon tax equivalent to 2,000 INR/ton (25 USD/ton) of carbon dioxide equivalent leads to a 70% reduction in emissions. But only 18% of this reduction comes from fuel-switching within existing firms. I find that the larger reductions come from reallocation of output across firms (58%) and costly reduction in aggregate output (24%). Substantial heterogeneity in the fuel efficiency of existing furnaces coupled with the limited geographical reach of natural gas pipelines towards high-emission firms explains the prevalence of output reallocation relative to fuel switching.
Keywords: Firm dynamics; input choice; fuel efficiency; production function; climate change (search for similar items in EconPapers)
JEL-codes: H23 L11 L61 Q41 Q52 (search for similar items in EconPapers)
Date: 2024-04-15
New Economics Papers: this item is included in nep-ene and nep-env
References: View references in EconPapers View complete reference list from CitEc
Citations:
Downloads: (external link)
https://mpra.ub.uni-muenchen.de/121139/1/MPRA_paper_121139.pdf original version (application/pdf)
Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:121139
Access Statistics for this paper
More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().