Curvature and competitiveness: Carbon taxes in cattle markets

Abstract

AbstractEnvironmental regulation can interact with agricultural markets to produce underappreciated competitiveness and leakage effects. This paper measures effective carbon tax stringency by structurally recovering the domestic supply schedule for a trade‐exposed beef cattle industry such that elasticities and carbon tax rates change with product prices (i.e., due to the curvature of the supply function). Two basic propositions from the economics of taxation—that excess burdens increase in elasticities and tax rates—are shown to cause the stringency of uniform carbon policy to vary nonlinearly with output prices. Based on the domestic supply function, the relationship between marginal excess burden, a measure of policy stringency from the industry's perspective, and product prices is estimated. Several policy‐relevant counterfactual scenarios are explored. Results show that with moderately high output prices, supply elasticities are small and the efficiency cost of a $40/tCO2e carbon tax (gross of environmental benefits) is less than $0.01 per dollar tax revenue. As prices decline, supply curves become increasingly elastic and marginal excess burdens grow rapidly.