Variability in Emissions Cost: Implications for Facility Location, Production and Shipping

As countries around the world formulate policies to mitigate greenhouse gas (GHG) emissions, policymakers must weigh the merits of implementing an emissions tax or a cap-and-trade system. A primary barrier to the adoption of a cap-and-trade system is the idea that variability and uncertainty in the permit price (and hence a firm’s emissions cost) has an adverse impact on domestic manufacturing firms. An emissions tax, on the other hand, can establish a fixed, certain emissions cost. Analysis in this chapter, however, suggests that variability in the emissions cost under a cap-andtrade system is beneficial, stimulating domestic manufacturing, compared to a mean-equivalent emissions tax. Hence, if emissions intensity among foreign competitors located in the region without climate policy is high, then variability in the emissions cost decreases expected emissions from production. Although global emissions may increase after a region initiates climate policy, due to a shift in manufacturing to a region without climate policy and increased transportation, that “leakage” phenomenon might be mitigated by adopting a cap-and-trade system, compared to a mean-equivalent tax. Ö. İşlegen ( ) Kellogg School of Management, Northwestern University, Evanston, IL 60208, USA e-mail: [email protected] E.L. Plambeck Stanford Graduate School of Business, Stanford University, Stanford, CA 94305, USA e-mail: [email protected] T.A. Taylor Haas School of Business, University of California, Berkeley, Berkeley, CA, USA e-mail: [email protected] © Springer International Publishing Switzerland 2016 A. Atasu (ed.), Environmentally Responsible Supply Chains, Springer Series in Supply Chain Management 3, DOI 10.1007/978-3-319-30094-8_16 283 284 Ö. İşlegen et al.