Neuhoff, K., Ritz, R.

Carbon cost pass-through in industrial sectors

CWPE1988

Abstract: To achieve the ambitions of the 2015 Paris Climate Agreement, the decarbonization of energy-intensive industrial sectors is becoming increasingly important. This paper focuses on the economics of carbon cost pass-through: the change in product prices induced by carbon pricing. We provide a theoretical framework to understand pass-through at the sectoral level and a constructive review of the empirical evidence from the EU ETS and other jurisdictions. Our analysis is structured around three key drivers: international trade, market structure, and free allowance allocation. We provide a synthesis of our key findings for policymakers and identify gaps in the literature for future research.

Keywords: Carbon pricing, cost pass-through, free allocation, full carbon price internalization, international trade, market structure

JEL Codes: L11 L70 Q54 Q58

Author links: Robert Ritz

PDF: https://www.econ.cam.ac.uk/research-files/repec/cam/pdf/cwpe1988.pdf