he environmental cost of production—the impacts of effluents such as greenhouse gas (GHG) emissions, air

particulates, and water pollutants—on society and the environment is a growing global concern for governments, corporations, and consumers. Proposed regulatory schemes seek to address many of these environmental problems by imposing policies to internalize the environmental costs associated with production—such as a tax on the emissions of carbon dioxide, or a carbon tax. But businesses lack a framework that provides a quick and easy way to analyze the effect that changing environmental cost structures may have on corporate business strategy.

OUR SOLUTION We propose a hybrid modeling methodology that uses an

EIO-LCA framework and market elasticity of supply and demand estimates to assess the impact of environmental taxation on producers. We demonstrate the methodology for an example case of the personal computer (PC) market.

Specifically, we model the projected change of market equilibrium in the PC market in terms of a per-unit marginal cost increase per PC produced, resulting from a $/ton carbon tax levied on Original Equipment Manufacturers (OEMs). We consider three scenarios1: A) a ‘no cost’ scenario, where the initial market equilibrium is maintained (OEMs absorb the total cost of the tax), B) a ‘low cost’ scenario, where a $10/ton carbon tax is levied on utilities gets passed along to the computer manufacturing companies, but only the direct costs incurred by the IT equipment vendor are passed along to the consumer,2 and C) a ‘high cost’ scenario, where a $50/ton carbon tax is levied on utilities across both direct and indirect (i.e. supply chain) production, and all costs get passed along to the end user. Under all scenarios, we implicitly assume that the incidence of a carbon tax on utilities will be borne by utility consumers; this will be examined in future work.

For the above three scenarios, we estimate the effect of taxation in terms of changes in market equilibrium as well as corresponding alterations to the manufacturer cost structure and operating margin. First, using PC market data [1], we

All authors are with Hewlett Packard Laboratories in Palo Alto, California. 1 The estimates for carbon tax values are based on a study of similar

schemes in comparable markets in Europe. 2 This scenario corresponds to a case where suppliers to IT vendors absorb

increased costs internally.

determine the equilibrium price and quantity for the PC market. Then, using CO2 impact factors from eiolca.net [2] for the electronic computer manufacturing sector, we identify what fraction of direct and indirect (N-tier) carbon emissions can be attributed to power generation and supply (utilities) within the PC manufacturing industry. We use these estimates to calculate the total utility-generated CO2 emissions from PC manufacturing, and the resulting cost increase for each of the three scenarios above. Lastly, for scenarios B and C we use elasticity of demand and supply estimates from the PC market [3]-[4] to calculate the incidence of the carbon tax [5]:

Tax incidence: )( εη

η−

(1)

where η is the elasticity of supply and ε is the elasticity of demand. Essentially, the incidence predicted by Eq. (1) provides an estimate of how much the supply curve in the PC market will shift in reaching a new equilibrium.

RESULTS AND CONCLUSIONS Our analysis suggests that the new equilibrium in the PC

market would correspond to a point where the average market price of PCs has increased by between 0.02% and 0.5%, which would drive a decrease in market volume of between 0.02% and 0.7%. At this level, each dollar in OEM margins today would see a reduction of between 0.9 cents and 6.1 cents.

In an increasingly regulatory environment, a straightforward

framework for assessing the economic cost of various regulations will be vital for all types of businesses and organizations. The key contribution of this work is a simple framework that combines sector-specific EIO-LCA models with industry-specific elasticity of supply and demand estimates to estimate the incidence of environmental regulations.

REFERENCES [1] A.J. Hanson and D. Daoud, “Worldwide PC 2009-2013 Forecast

Update: January 2010,” IDC #221472, vol. 1, Jan. 2010. [2] Carnegie Mellon University Green Design Institute, Economic Input-

Output Life Cycle Assessment (EIO-LCA), US 1997 Industry Benchmark model, 2008. Available: http://www.eiolca.net, Accessed 4 Nov. 2009.

[3] B.L. Bayus and W.P. Putsis. “Product proliferation: An empirical analysis of product line determinants and market outcomes,” Marketing Science, vol.18 (2), Spring 1999.

[4] Deutsche Bank “Enterprise Edge #59: Global PC elasticity analysis,” Market Bulletin, May 2006.

[5] L. J. Kotlikoff and L. H. Summers. "Tax incidence," NBER Working Paper 8829, Mar. 2002.

The Economic Cost of a Carbon Tax on the Personal Computer Market

Kiara Corrigan, Amip Shah, and Chandrakant Patel

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