B.C. Business Matters:
Jock Finlayson >>
Reducing Greenhouse Gas Emissions - The Costs Vary By Industry
Policy-makers in an increasing number of jurisdictions are committed to taking steps to reverse – or at least slow the growth of – greenhouse gas (GHG) emissions that are believed to contribute to global warming. A number of different policy instruments have been deployed to help achieve this goal:
- taxes on fossil fuels to encourage reduced consumption of GHG-intensive forms of energy (e.g., a carbon tax like the one in place in British Columbia);
- regulated limits on GHG emissions produced by different industries;
- trading schemes that enable private parties to buy and sell the “right” to emit particular amounts of GHGs;
- product standards to improve energy efficiency and/or to reduce the use of energy (in Canada, these now exist for appliances, light bulbs, vehicles, and various kinds of industrial equipment);
- changes to building codes intended to increase energy efficiency;
- subsidies/incentives to stimulate fuel-switching or other modifications in energy use patterns; and,
- laws that compel utilities to produce specified amounts of renewable energy (e.g., renewable portfolio standards in the electricity sector).
An important question is who bears the costs associated with government policies aimed at reducing GHG emissions. This question is particularly germane for small jurisdictions like BC (or Canada), whose domestic activities contribute very little to the larger global problem of excessive atmospheric concentrations of GHGs. There are also likely to be benefits from GHG mitigation policies, but here we limit attention to the cost side of the equation.
GHG mitigation costs will not be uniform across the economy; indeed, they vary widely across industry sectors as well as among households. From a business community perspective, the costs of government taxes/regulations to reduce emissions will be highest for resource-based industries, manufacturers, electricity producers, and firms in the transportation sector – reflecting the fact that these industries tend to be more energy intensive than other sectors of the economy.
A recent academic paper explores this topic in the context of the US economy, by modelling the impact of a $15 per tonne carbon tax for a wide range of industries. The authors estimate the cost per dollar of industry sales from a $15 tax applied to every metric tonne of carbon dioxide emissions. Table 1 lists the 20 narrowly defined US industries expected to face the biggest hit, according to the methodology used. Many of these industries are “trade-exposed” – that is, they face actual or potential competition from imports, and/or sell a portion of their output in foreign markets. Typically, trade-exposed industries are more sensitive to and affected by the additional costs that flow from a domestic carbon tax, or other GHG mitigation policies.
It must be noted that the incidence of any tax on the inputs used by businesses differs from the initial increase in production or operating costs. When tax-inclusive costs increase for a given enterprise, the effects will be felt by some or all of the firm’s customers (via higher prices), employees (via lower real wages), and shareholders (via lower profits). Which party bears how much of the extra cost from a carbon tax (or GHG emissions cap) will depend on a host of considerations, including the degree of competition in the product markets served, whether domestic buyers can shift to lower-priced (non-taxed) imported goods, the bargaining power of employees versus employers, the climate/carbon policies adopted by competing jurisdictions, and other factors.
It is far from a simple matter to determine how all of this is likely to play out in a real-world setting. In the end, however, it is wise to remember that it is people – in their capacities as consumers, employees and investors – who ultimately shoulder the cost of government-imposed taxes and regulations, not corporations.
Cost of $15/tonne CO2 Tax
As a Percentage of Product Value, US
|Sector Description||Cost Increase|
|2||Power generation and supply||11.2%|
|4||Nitrogenous fertilizer manufacturing||6.7%|
|5||Phosphatic fertilizer manufacturing||5.5%|
|6||State & local govt. electric utilities||4.8%|
|7||Petroleum lubricating oil & grease man.||4.1%|
|8||Industrial gas manufacturing||4.0%|
|9||Primary aluminum production||4.0%|
|10||Cellulosic organic fiber manufacturing||3.7%|
|12||Ferroalloy and related product manuf.||3.4%|
|13||Synthetic dye and pigment manuf.||3.2%|
|14||Iron ore mining||3.1%|
|15||Other non-metallic mineral mining||2.9%|
|16||Iron and steel mills||2.7%|
|17||Wet corn milling||2.7%|
|20||Fertilizer, mixing only, manufacturing||2.2%|
|Source: C. Kolstad, "Who Pays for Climate Regulation?",
Stanford Institute for Economic Policy Research, Policy Brief, January 2014.
 Like businesses, households also differ in their energy consumption patterns.
 Depending on the mix of energy generation sources, which differs across jurisdictions.
 The analysis is based on an input-output model of the US economy. Among other things, it assumes no substitution across energy sources in response to the carbon tax.