Rethinking Trade Exposure: The Incidence of Environmental Charges in the Nitrogenous Fertilizer Industry

The imposition of environmental regulations, such as greenhouse gas charges, to domestic manufacturing traditionally creates concerns over the impacts of those regulations on international competition and downstream product prices. The US Nitrogen fertilizer industry, an energy-intensive trade-exposed industry, has been considered by conventional metrics to be one of the most vulnerable to such effects. Since 2010 the industry has undergone increased concentration of producers and a dramatic reduction in US natural gas prices. While the decline in domestic gas prices has reduced production costs, it has not produced a corresponding decrease in fertilizer prices. Our research establishes that the pass-through of changes in natural gas prices, a key input to nitrogenous fertilizer, declined from roughly 80% prior to 2010 to effectively zero through 2014. One implication of this change in pricing dynamics is that the imposition of greenhouse gas (GHG) regulations on producers of nitrogen fertilizers would have almost no impact on fertilizer prices. Within the context of a GHG cap-and-trade program, the allocation of emissions allowances as considered under proposed Federal legislation, and as practiced in California today, would likely result in a transfer to fertilizer producers on the order of hundreds of millions of dollars with no impact on fertilizer prices or emissions. ∗Bushnell: Dept. of Economics, UC Davis. Email: [email protected] Humber: Dept. of Agricultural and Resource Economics, UC Davis. Email: [email protected] . This work was supported by the National Institute of Food and Agriculture, U.S. Department of Agriculture, under Agreement No. 2012-67023-30236.