THE INCIDENCE OF CARBON TAXES IN U.S. MANUFACTURING: LESSONS FROM ENERGY COST PASS-THROUGH By

This paper studies how changes in energy input costs for U.S. manufacturers affect the relative welfare of manufacturing producers and consumers (i.e., incidence). In doing so, we develop a novel partial equilibrium methodology designed to estimate the incidence of input taxes. This method simultaneously accounts for three determinants of incidence that are typically studied in isolation: incomplete pass-through of input costs, differences in industry competitiveness, and substitution amongst inputs used for production. We apply this methodology to a set of U.S. manufacturing industries for which we observe plant-level unit prices and input choices. We find that about 70 percent of energy price-driven changes in input costs are passed through to consumers. We combine industry-specific pass-through rates with estimates of industry competitiveness to show that the share of welfare cost borne by consumers is 25-75 percent smaller (and the share borne by producers is correspondingly larger) than models featuring complete pass-through and perfect competition would suggest. JEL: H22, H23, Q40, Q54 ∗We thank Joe Altonji, Ernesto dal Bó, Severin Borenstein, Lucas Davis, David Donaldson, Penny Goldberg, Kostas Metaxoglou, Jim Poterba, Jim Sallee, Glen Weyl, Danny Yagan and various seminar participants for useful comments and discussions. Funding from the Department of Energy, the National Science Foundation, the Sloan Foundation, and the NBER is gratefully acknowledged. We would also like to thank Randy Becker, Cheryl Grim, and Kirk White for sharing code and data. Jonathan Kadish and Carla Johnston provided excellent research assistance. The research in this paper was conducted while the authors were Special Sworn Status researchers of the U.S. Census Bureau at the Berkeley and Yale Census Research Data Center. Research results and conclusions expressed are those of the authors and do not necessarily reflect the views of the Census Bureau. This paper has been screened to insure that no confidential data are revealed.