Variability in Emissions Cost: Implications for Facility Location, Production and Shipping

Abstract

As countries around the world formulate policies to mitigate greenhouse gas (GHG) emissions, policymakers must weigh the merits of implementing an emissions tax or a cap-and-trade system. A primary barrier to the adoption of a cap-and-trade system is the idea that variability and uncertainty in the permit price (and hence a firm’s emissions cost) has an adverse impact on domestic manufacturing firms. An emissions tax, on the other hand, can establish a fixed, certain emissions cost. Analysis in this chapter, however, suggests that variability in the emissions cost under a cap-and-trade system is beneficial, stimulating domestic manufacturing, compared to a mean-equivalent emissions tax. Hence, if emissions intensity among foreign competitors located in the region without climate policy is high, then variability in the emissions cost decreases expected emissions from production. Although global emissions may increase after a region initiates climate policy, due to a shift in manufacturing to a region without climate policy and increased transportation, that “leakage” phenomenon might be mitigated by adopting a cap-and-trade system, compared to a mean-equivalent tax.