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Staff Reports

Firms’ Supply Chain Adaptation to Carbon Taxes

Number 1136
November 2024 Revised November 2025

JEL classification: F14, F18, F64, H23, Q56

Authors: Pierre Coster, Julian di Giovanni, and Isabelle Mejean

This paper studies how firms adjust input sourcing in response to climate policy. Using the EU Emissions Trading System (ETS) as a natural experiment and French product-level import and production data, we show that firms increasingly shifted imports of ETS-regulated inputs to non-EU countries over the 2010s as the policy became more stringent, indicating carbon leakage. This leakage is economically significant: the share of ETS-regulated products sourced from outside the EU rose by 4.3 percentage points after the ETS was implemented. Motivated by these empirical findings, we estimate a heterogeneous firm model using pre-ETS data. Simulating the model under a €100 carbon tax reproduces observed leakage, raises domestic prices, and modestly reduces French emissions. Adding a carbon tariff similar to the EU's Carbon Border Adjustment Mechanism (CBAM) reverses the leakage but further increases prices. The combined ETS+CBAM regime is seven times more effective than the ETS alone in reducing emissions.

Full Article

Author Disclosure Statement(s)

Pierre Coster
Regarding our paper on Firms' Supply Chain Adaptation to Carbon Taxes with Isabelle, I declare that I have no relevant or material financial interests that relate to the research described in the paper.

Julian di Giovanni
Regarding our paper on Firms' Supply Chain Adaptation to Carbon Taxes with Pierre Costner and Isabelle Mejean, I declare that I have no relevant or material financial interests that relate to the research described in the paper.

Isabelle Mejean
The author declares that she has no relevant or material financial interests that relate to the research described in this paper.

Suggested Citation:
Coster, Pierre, Julian di Giovanni, and Isabelle Mejean. 2024. “Firms’ Supply Chain Adaptation to Carbon Taxes.” Federal Reserve Bank of New York Staff Reports, no. 1136, November. https://doi.org/10.59576/sr.1136

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