ABSTRACT
An important consideration for any carbon-oriented tax (or regulatory policy) is its effect on the competitiveness of U.S. firms in sectors exposed to international trade. A carbon tax would increase energy costs for U.S. firms, but not their foreign
competitors (until and unless those competitors also face a tax or other carbonpricing policy). Firms in sectors that are both energy-intensive and trade-exposed (EITE) are particularly vulnerable to competitiveness effects. A consequential shift in market share to producers in other nations, particularly those with weak or nonexistent carbon pricing policies, also erodes environmental benefits from a carbon tax, to the extent that emissions are displaced rather than truly abated. This “leakage” effect, along with the loss of U.S. competitiveness itself, is cited by opponents of a carbon tax as a key argument against it.
