The global nature of climate change creates challenges for regional initiatives. In California, debates about the implementation of state-level policies have been dominated by concerns about potentially adverse impacts on industrial competitiveness, trade flows, and emissions "leakage"  in energy intensive and trade exposed (EITE) industries.

Assembly Bill 32, which has led to a state-wide greenhouse gas emissions cap and other policies, directs the state’s regulators “to minimize leakage to the extent feasible."  In response, implementing agencies have identified those industries most at risk of emissions leakage based on industry-level measures of emissions intensity and trade share.

Using historical and confidential plant-level data from the Census of Manufactures and other sources, we examine the effects of energy prices on the competitiveness of California plants in 27 EITE manufacturing industries compared to both domestic and international competitors. We use the results to estimate leakage caused by the emissions cap.

We estimate simple linear regressions in which the dependent variable is the plant’s output, emissions, or employment and the independent variables include the electricity and natural gas prices faced by the plant, as well as an extensive set of controls for industry and regional trends in labor markets and economic activity. An important innovation in this analysis is that we include as independent variables the energy prices in both neighboring states/regions, and in California’s major international trading partners, which allows a direct analysis of emissions leakage and makes it possible to determine whether domestic plants outside of California benefit from the policy. Furthermore, we distinguish the short-run effects of energy prices (holding each plant’s capital stock fixed) and the long run effects by performing the analysis over different time horizons and by analyzing the effect of energy prices on investment and plant entry and exit.

The analysis provides insight into the policy’s effects on output, emissions, and employment at manufacturing plants in California and other states. Specifically, we can use the estimation results and observed changes in energy prices during the early years of the program to estimate what would have happened in the absence of the policy, and compare with what actually happened. We can also place bounds on adverse employment effects, and assess and compare both short-run and long-run effects.