“Environmental Policy with Heterogeneous Plants” by Zhe Li
Shanghai University of Finance and economics
We show that accounting for plant heterogeneity is important for the evaluation of environmental policies. We develop a general equilibrium model in which monopolistic competitive plants differ in productivity, produce differentiated goods and optimally choose a discrete emission-reduction technology. Calibrated to the Canadian data, the model shows two main results. First, the aggregate costs of using an emission tax to reduce 20% of current emissions are twice as large as what would result with homogenous plants due to the selection of an abatement technology. Second, an emission standard outperforms an emission tax since the tax causes price distortions.