CFDP 2038R3

The Incidence of Carbon Taxes in U.S. Manufacturing: Lessons from Energy Cost Pass-through

Author(s): 

Publication Date: May 2016

Revision Date: March 2018

Pages: 49

Abstract: 

This paper studies how changes in energy input costs for U.S. manufacturers affect the relative welfare of manufacturing producers and consumers (i.e., incidence). In doing so, we develop a novel partial equilibrium methodology designed to estimate the incidence of input taxes. This method simultaneously accounts for three determinants of incidence that are typically studied in isolation: incomplete pass-through of input costs, differences in industry competitiveness, and substitution amongst inputs used for production. We apply this methodology to a set of U.S. manufacturing industries for which we observe plant-level unit prices and input choices. We find that about 70 percent of energy price-driven changes in input costs are passed through to consumers. We combine industry-specific pass-through rates with estimates of industry competitiveness to show that the share of welfare cost borne by consumers is 25-75 percent smaller (and the share borne by producers is correspondingly larger) than models featuring complete pass-through and perfect competition would suggest.

Keywords: 

Pass-through, Incidence, Energy prices, Productivity, Climate change

JEL Classification Codes: H22, H23, Q40, Q54

JEL Classification Codes: H22H23Q40Q54