The Importance of Producer
Price Markups for Carbon Tax
Evaluations: Evidence fromTaiwan
Yi-Hua Wu1 , Jin-Li Hu2, Tzu-Yar Liu1, Toshihiko Masui3

1. Industrial Technology Research Institute
2. National Chiao Tung University

3. National Institute for Environmental Studies
Copyright 2019 ITRI 工業技術研究院

Motivation
Carbon Tax/Carbon Trade One of policies to combat climatechangeCompetitive Market Setting for CGE
 Many CGE models choose competitivemarket for the investigation of carbon
pricing
In reality, not all industries are competitive Industries make profits Firms could be able to set prices higher thanmarginal costs

Copyright 2019 ITRI 工業技術研究院

2

Motivation
Importance of Price Setting Ability
𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑷𝒀,𝒕 𝒋 𝒀𝒕 𝒋 − 𝑪𝒐𝒔𝒕𝒕 𝒋 Competitive market: firms are pricetakers and cannot affect prices
 The market determine the prices
First order conditions:

𝑷𝒀,𝒕 𝒋 = 𝑴𝑪𝒕 𝒋

Copyright 2019 ITRI 工業技術研究院

3

Motivation
Importance of Price Setting Ability
𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑷𝒀,𝒕 𝒋 𝒀𝒕 𝒋 − 𝑪𝒐𝒔𝒕𝒕 𝒋

 Price markups over marginal costs:
priceFirst order conditions:∆𝑷𝒀,𝒕 𝒋𝑷𝒀,𝒕 𝒋 +𝒀𝒕 𝒋 = 𝑴𝑪𝒕 𝒋∆𝒀𝒕 𝒋
𝒀𝒕 𝒋 ∆𝑷𝒀,𝒕 𝒋1+
𝑷𝒀,𝒕 𝒋 = 𝑴𝑪𝒕 𝒋
𝑷𝒀,𝒕 𝒋 ∆𝒀𝒕 𝒋

DemandQuantity

1 − 𝜺𝒀 𝒋 𝑷𝒀,𝒕 𝒋 = 𝑴𝑪𝒕 𝒋
𝒀 𝒋 ∆𝑷𝒀,𝒕 𝒋

Because 𝜺𝒀 𝒋 = − 𝑷𝒕

𝒀,𝒕 𝒋 ∆𝒀𝒕 𝒋

𝑷𝒀,𝒕 𝒋 > 𝑴𝑪𝒕 𝒋
Copyright 2019 ITRI 工業技術研究院>0Price is higher than marginal cost4Motivation
Difference Competitive
𝑷𝒄𝒀,𝒕 𝒋 = 𝑴𝑪𝒕 𝒋 Price markups
𝑷𝒎
𝒀,𝒕 𝒋 =

𝑴𝑪𝒕 𝒋

If the carbon tax has
the same effects onmarginal costs

𝒄𝑷𝒎
𝒀,𝒕 𝒋 > 𝑷𝒀,𝒕 𝒋

1 − 𝜺𝒀 𝒋𝜺𝒀 𝒋 >0Purpose Compare the impacts of firm pricing
strategy on policy evaluation (carbontax, in this paper)

Copyright 2019 ITRI 工業技術研究院

5ModelIntuitions
 Elasticity 𝜼𝒚(𝒊 highersubstitute easilyMonopolisticpower is lowLow price markups over marginal costs
ExportUpstream producers

Downstream producers

Domestic𝜼𝒚(𝒊Import

OutputcapitalLabor

EnergyNon-Energy

Profits

FinalGoods

HouseholdConsumption
Copyright 2019 ITRI 工業技術研究院

Government 6Investments

ModelPrice Markups
 𝜼𝒚 𝒊 controls elasticity and price markups
𝜼𝒚(𝒊Export
OutputMax 𝑷𝑸,𝒕 𝒋 𝑸𝒕 𝒋 − 𝑷𝑫,𝒕 𝒋 𝑫𝒕 𝒋 − (1 + 𝝉𝑰𝑴,𝒕 (𝒋 𝑷𝑰𝑴,𝒕 𝒋 𝑰𝑴𝒕 (𝒋𝑸𝒕 𝒋 =𝒂𝑫 𝒋

𝑷𝑸,𝒕 𝒊 = 𝒂𝑰𝑴 𝒋

1ImportDomestic𝑷𝒀,𝒕 𝒋 ∆𝑫𝒕 𝒋𝑷𝒀,𝒕 𝒋 ∆𝑬𝑿𝒕 𝒋−𝜺𝒀 𝒋
𝒀𝒕 𝒋 ∆𝑷𝑫,𝒕 𝒋
𝒀𝒕 𝒋 ∆𝑷𝒀,𝒕 𝒋
𝑫𝒕 𝒋𝑷𝑫,𝒕 𝒋 𝑫𝒕 𝒋
𝑷𝒀,𝒕 𝒋 ∆𝑬𝑿𝒕 (𝒋=−−𝜼𝒚 𝒊 +𝜼𝒚 𝒊 −𝒀𝒕 𝒋𝑷𝑸,𝒕 𝒋 𝑸𝒕 𝒋
𝒀𝒕 𝒋 ∆𝑷𝒀,𝒕 𝒋=−1
𝜼𝒒 𝒋

𝑫𝒕 𝒋𝜼𝒒 𝒋 −1
𝜼𝒒 𝒋+ 𝒂𝑰𝑴 𝒋

1 + 𝝉𝑰𝑴,𝒕 (𝒋 𝑷𝑰𝑴,𝒕 𝒋

𝑰𝑴𝒕 𝒋 = 𝒂𝑰𝑴 𝒋

𝑫𝒕 𝒋 = 𝒂𝑫 𝒋
Copyright 2019 ITRI 工業技術研究院

1−𝜂𝑦 𝑖1
𝜼𝒒 𝒋+ 𝒂𝑫 𝒋

𝑰𝑴𝒕 𝒋𝑷𝑫,𝒕 𝒋

𝑷𝑰𝑴,𝒕 𝒋
𝑷𝑸,𝒕 𝒊𝑷𝑫,𝒕 𝒋
𝑷𝑸,𝒕 𝒊𝜼𝒒(𝒋𝜼𝜼𝒒 𝒋 −1 𝒒 𝒋 −1𝜼𝒒 𝒋1−𝜂𝑦 𝑖11−𝜂𝑦 𝑖−𝜼𝒚(𝒊𝑸𝒕 𝒋−𝜼𝒚(𝒊𝑸𝒕 𝒋Results
Carbon Emission Goal Carbon tax is launched to achieve the emission
target
CO2 Emissions: Reference and Target Path

Copyright 2019 ITRI 工業技術研究院

8Results
Price markups over marginal costs
 Four elasticity values: benchmark(+0),+0.5, +1.0, +2.0, +4.0
 High elasticitylow price markups
Price Markup Relative to +0.0

high price markups
Copyright 2019 ITRI 工業技術研究院

low price markups
9Results
Consumer Price Index (CPI) High elasticity, low markups on CPI
 Less impacts on GDPCPI

high price markups
Copyright 2019 ITRI 工業技術研究院

GDP

low price markups

high price markups

low price markups
10Results
Carbon Price High elasticityLess impacts on GDP
 Higher carbon prices to reach the target
Carbon Price relative to theReferene Scenario
high price markups

Copyright 2019 ITRI 工業技術研究院

low price markups

11Conclusions
The Carbon Tax Evaluations are related tothe Specifications on Market Structure High Price MarkupsEnlarge theimpacts of carbon tax burdens large
GDP losses
Competitive Market Structure might mitigate
the economic losses Reforms in the Japanese electricity market
since 1995 in order to enhancecompetitiveness Reforms in the Taiwanese electricity market.
Copyright 2019 ITRI 工業技術研究院

12Appendix

Copyright 2019 ITRI 工業技術研究院

13

Results
Effects on Demand Side High ElasticityLow impacts on demand side

Consumption

Copyright 2019 ITRI 工業技術研究院

Investment

14

Results
Effects on Demand Side High ElasticityLow impacts on demand side

ExportCopyright 2019 ITRI 工業技術研究院

Import15

Results
Domestic v.s. Foreign Markets
 Share of domestic goods market
increases after the launch of carbon tax.
 High elasticityLow pricemarkupsLower domestic share

𝑫𝒔𝒕 =26
𝒋=1 𝑫𝒕 𝒋26
𝒋=1 𝒀𝒕 𝒋

Domestic Goods Share
Price Markups
TaxCarbon Tax
Copyright 2019 ITRI 工業技術研究院

16