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Capacity Decisions with Demand Fluctuations and Carbon Leakage

descriptionPublicationkeyboard_double_arrow_right Article , Research , Preprint , Report 01 Jan 2014 France English Publisher:Elsevier BVJournal:SSRN Electronic Journal (eissn: 1556-5068,

Authors: Guy Meunier; Guy Meunier; Jean Pierre Ponssard;

doi: 10.2139/ssrn.2404885 , 10.1016/j.reseneeco.2014.01.005

handle: 10419/93434

Capacity Decisions with Demand Fluctuations and Carbon Leakage

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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.

Country

France

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Keywords

Capacity decisions, and Uncertainty/D.D8.D81 - Criteria for Decision-Making under Risk and Uncertainty, capacity decisions,carbon leakage,demand fluctuations,capacity decisions., carbon leakage, demand fluctuations, capacity decisions, D92, JEL: Q - Agricultural and Natural Resource Economics • Environmental and Ecological Economics/Q.Q5 - Environmental Economics/Q.Q5.Q56 - Environment and Development • Environment and Trade • Sustainability • Environmental Accounts and Accounting • Environmental Equity • Population Growth, [SDE.ES] Environmental Sciences/Environment and Society, JEL: L - Industrial Organization/L.L1 - Market Structure, uncertainty, [SHS.ECO] Humanities and Social Sciences/Economics and Finance, carbon leakage, L13, ddc:330, Demand fluctuations, Carbon leakage, investment, [SHS.ECO]Humanities and Social Sciences/Economics and Finance, JEL: D - Microeconomics/D.D8 - Information, Q56, Firm Strategy, D81, Knowledge, capacity decisions, [SHS.GESTION]Humanities and Social Sciences/Business administration, demand fluctuations, environmental economics, and Market Performance/L.L1.L13 - Oligopoly and Other Imperfect Markets, jel: jel:D81, jel: jel:D92, jel: jel:L13, jel: jel:Q56

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