Cournot seminar – Marc Baudry (Economix, Université Paris Nanterre)

Event details :

We are pleased to welcome to the next session of the BETA Cournot seminar organised with the support of the FSEG on Friday 06/11, at 02:00p.m.:

Marc Baudry (Economix, Université Paris Nanterre)

who will present his paper entitled

CBAM and free allocation of allowances: friends or foes?

Abstract: To counter carbon leakage that could jeopardize its Net Zero strategy, the European Commission adopted, through the CBAM regulation, a pricing mechanism for imported emissions coupled with the phase out of free allowances on its carbon market (EU-ETS). The speed of this phase out, which will be complete by 2034, raises questions about its impact on industrial activity within the European Union. To address these questions, this article adapts the standard model of monopolistic competition used in international economics in two ways. First the model is extended by incorporating a non-zero price super-elasticity of demand in the spirit of Klenow and Willis (2016). It results in a variable carbon cost pass-through that depends on the price of the good. Second, the model is extended to a value chain with an upstream sector with heterogeneous firms covered by the carbon market and a downstream sector that is not covered. It allows for the integration of four types of carbon leakage: i) substitution in the domestic market; ii) substitution in foreign markets; iii) reshuffling along the value chain iv) relocation of activities. The last type of leakage is tackled with by distinguishing between short-term and long-term equilibrium, leveraging the result that the Coase principle of independence no longer holds in the long run. The model is calibrated on pre-CBAM data for the steel value chain with steel production as the upstream sector and the automotive industry as the downstream sector. Simulations are then implemented to compare the official CBAM regulation with an alternative scenario without the phase out of free allowances. Whatever the scenario considered, drastic changes in the structure of the upstream sector are expected, with both an increase in the total domestic production level and a drop in the average carbon intensity. It is also shown that the phase out of free allowances mainly increases the aggregate domestic prices of the upstream and downstream goods and reduces the production level of the domestic downstream sector. In contrast, the impacts on the production of the upstream sector are limited.

If you would like to meet Marc Baudry, please contact Quitterie Roquebert.