@article{38c4af8f293d4542a1420970ff9f2187,
title = "Mitigating Emissions Leakage in Incomplete Carbon Markets",
abstract = "Policies regulating greenhouse gas emissions apply to a small subset of emitting sources. This raises a formidable concern: emissions can “leak” from regulated to unregulated sources. We provide a theoretical basis for deriving industry-specific measures of leakage risk and for calibrating the output-based subsidies that are currently used to mitigate leakage. Using US energy price variation as a proxy for variation that would be induced by a domestic carbon price, we show how theoretically consistent leakage-mitigating subsidies can be calibrated. We simulate the impacts of a domestic carbon price on US manufacturing with and without these subsidies. Absent mitigation, emissions leakage is substantial. Output-based subsidies targeted on the basis of our leakage risk measures significantly reduce this leakage risk. In contrast, the current practice of coarsely targeting subsidies on the basis of emissions intensity and trade exposure delivers a small fraction of leakage mitigation benefits while incurring significant costs.",
keywords = "Carbon pricing, Climate change, Energy markets",
author = "Fowlie, {Meredith L.} and Mar Reguant",
note = "Funding Information: Meredith L. Fowlie is at the University of California, Berkeley (fowlie@berkeley.edu). Mar Reguant is at Northwestern University (mar.reguant@northwestern.edu). We thank seminar participants at the Center for Monetary and Financial Studies (CEMFI), Eidgen{\"o}ssische Tech-nische Hochschule (ETH) Z{\"u}rich, the London School of Economics, University of Basel, University of California Berkeley, University of British Columbia, University of Chicago Harris School, University of Illinois, University of Iowa, University of Mannheim, University of Toronto, University of Victoria, World Congress of Environmental and Resource Economists (WCERE), the World Bank, and Yale University for helpful comments. We thank Karl Dunkle Werner, Hal Gordon, Louis Preonas, Jingyuan Wang, Matt Woerman, and Katie Wright for excellent research assistance. Reguant acknowledges the support of NSF grant SES-1455084. Dataverse data: https://doi.org/10.7910/DVN/PFJJXN Funding Information: participants at the Center for Monetary and Financial Studies (CEMFI), Eidgen{\"o}ssische Technische Hochschule (ETH) Z{\"u}rich, the London School of Economics, University of Basel, University of California Berkeley, University of British Columbia, University of Chicago Harris School, University of Illinois, University of Iowa, University of Mannheim, University of Toronto, University of Victoria, World Congress of Environmental and Resource Economists (WCERE), the World Bank, and Yale University for helpful comments. We thank Karl Dunkle Werner, Hal Gordon, Louis Preonas, Jingyuan Wang, Matt Woerman, and Katie Wright for excellent research assistance. Reguant acknowledges the support of NSF grant SES-1455084. Publisher Copyright: {\textcopyright} 2022 The Association of Environmental and Resource Economists. All rights reserved.",
year = "2022",
month = mar,
doi = "10.1086/716765",
language = "English (US)",
volume = "9",
pages = "307--343",
journal = "Journal of the Association of Environmental and Resource Economists",
issn = "2333-5955",
publisher = "University of Chicago Press",
number = "2",
}
