Electronic Thesis and Dissertation Repository

Thesis Format

Integrated Article

Degree

Doctor of Philosophy

Program

Economics

Supervisor

David Rivers

2nd Supervisor

Salvador Navarro

3rd Supervisor

Sergio Ocampo Diaz

Abstract

This thesis comprises three chapters examining firms' and markets' responses to regulation within the context of climate change.

In Chapter 2, I analyze how steel firms in India would respond to counterfactual carbon pricing, revealing a 70% emissions reduction for a carbon tax equivalent to 2,000 INR/ton (25 USD/ton) of carbon dioxide equivalent. By developing and estimating a rich production model, I find that only 18% of this reduction stems from fuel-switching within firms, while the majority comes from output reallocation across firms. This is because firms are differentially exposed to the tax, which increases the competitiveness of cleaner firms at the expense of dirtier firms. Chapter 3 investigates how firms adjust production in response to asymmetric carbon pricing across Canadian provinces. Using Canadian plant-level pollution release data, I find evidence that carbon leakage mitigated 45\% of emissions reduction efforts in British Columbia and Quebec, following two carbon taxes implemented in 2008 and 2007, respectively. Regulated firms became less competitive, and output shifted to unregulated firms in other Canadian provinces. In Chapter 4, I assess the efficiency of the U.S. natural gas pipeline network in responding to climate-induced demand and supply shocks. Analysis of the February 2021 cold wave in Texas reveals that an unregulated secondary market effectively reallocates capacity to alleviate supply and demand imbalances. However, concerns arise regarding market power on both sides of the market, potentially reducing efficiency gains from this secondary market.

Summary for Lay Audience

This thesis explores the interplay between firms and climate change. Specifically, I study how firms can reduce greenhouse gas emissions in response to environmental policy and investigate some of the unintended consequences of these policies. I also study the consequences of climate change on energy markets.

In Chapter 2, I study how firms respond to carbon pricing in a context where firms with very different technologies make decisions about which fuels to use and how much of each fuel to burn. I build a novel model to recover these fuel choices and quantify the impact of carbon pricing in the Indian steel industry using detailed plant-level data. I find that implementing a carbon tax equivalent to 2,000 INR/ton (25 USD/ton) of carbon dioxide leads to a 70% reduction in emissions. However, only 18% of this reduction comes from fuel-switching within existing firms. I find that the larger reductions come from the reallocation of output across firms (58%) and the reduction in aggregate output (24%).

While firms compete with each other across geographical regions, carbon policy is not always uniform across regions. This can lead to carbon leakage, shifting emissions from regulated to unregulated regions. In Chapter 3, I build a model that allows for region-specific carbon taxes. I estimate the model with publicly available data on a wide range of pollutants to quantify the effect of the British-Columbia (B.C.) carbon tax implemented in 2008. I find strong evidence of carbon leakage in other Canadian provinces, mitigating 45% of emissions reduction efforts in B.C. and Quebec.

In Chapter 4, I study the efficiency of the U.S. natural gas pipeline network in allocating pipeline capacity in response to unexpected weather shocks, increasingly common with climate change. I find that an unregulated secondary market, where contract holders can lease capacity to other shippers, reacts to significant regional demand fluctuations induced by these weather events, and alleviates the imbalance between supply and demand. However, a largely unregulated secondary market within a heavily regulated primary market raises concerns about market power.

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