Competitiveness Impacts of Climate Change Mitigation Policies

The pollution haven hypothesis suggests that unilateral domestic climate change mitigation policy would impose significant economic costs on carbon-intensive industries, resulting in declining output and increasing net imports. In order to evaluate this hypothesis, we undertake a two-step empirical analysis. First, we estimate how production and net imports change in response to energy prices using a 35-year panel of approximately 450 US manufacturing industries. Second, we use these estimated relationships to simulate the impacts of changes in energy prices resulting from a $15 per ton carbon price. We find that energy-intensive manufacturing industries are more likely to experience decreases in production and increases in net imports than less-intensive industries. Our best estimate is that competitiveness effects—measured by the increase in net imports—are as large as 0.8% for the most energy-intensive industries and represent no more than about one-sixth of the estimated decrease in production.