Emissions Trading, Firm Heterogeneity, and Intra-industry Reallocations in the Long Run

Abstract

Design of environmental regulation has substantial implications for size distribution and mass of firms within and across industries in the long run. In a general equilibrium model that accounts for endogenous entry and exit of heterogeneous firms, the welfare impacts of emissions trading are analytically decomposed into the effects on economy-wide income, mass of firms, size distribution, markups, and factor prices. Distortionary impacts on size distribution and permit price depend on the conditionality of permit distribution, interactions between changes in entry-exit conditions and in aggregate accounting conditions, the factor intensity of entry, and coverage of non-pollution-intensive sectors in emissions trading.

Trade and the Environment: New Methods, Measurements, and Results

“…13 Several recent papers have used the Melitz model to study the interaction between trade and the environment. See for example Yokoo (2009), Cui (2014), Forslid et al (2015), Kreickemeier and Richter (2014), Cole et al (2014), Ravetti and Baldwin (2014), Konishi and Tarui (2015), and Barrows and Ollivier (2016).…”

“…As noted in the text, the work in this area is heavily influenced by Melitz (2003), who pioneered the use of heterogeneous firm models to analyze the response of economies to trade liberalization. This approach has recently been used to study the response of polluting industry to changes in both trade policy and environmental policy by (among others) Yokoo (2009), Cui et al (2012), Forslid et al (2015), Kreickemeier and Richter (2014), Barrows and Ollivier (2016), Ravetti and Baldwin (2014), and Konishi and Tarui (2015). The model is based on that literature, but is modified to allow for international outsourcing (offshoring) of some production.…”

Default Risk, Productivity, and the Environment: Theory and Evidence from U.S. Manufacturing

“…Third, this paper uses the theoretical model to leverage the empirical results in order to estimate the effect of an increase in the economy-wide default risk on aggregate pollution emissions, and to empirically quantify the various disaggregate effects. More generally, this paper contributes to the recent environmental economics literature that incorporates firm heterogeneity and endogenous entry and exit decisions into general equilibrium models (Kreickemeier and Richter, 2013;Konishi and Tarui, 2015;Shapiro and Walker, 2015), and as far as I know, this is the first study to take the model to the data to numerically estimate the model. 2 To analyze the effect of default risk on aggregate pollution emissions, this paper develops a general equilibrium model with heterogeneous firms based on the Dixit and Stiglitz (1977) model of monopolistic competition.…”

“…TheDixit and Stiglitz (1977) model has been widely adopted in various economic fields, such as international trade (e.g.,Melitz, 2003). Because the theoretical predictions ofMelitz (2003) are consistent with empirical regularities in manufacturing sectors, and because many pollution-intensive sectors have become differentiated-good industries (such as chemicals and metals industries)(Konishi and Tarui, 2015), several papers have adapted theMelitz (2003) framework to account for pollution emissions(Kreickemeier and Richter, 2013;Konishi and Tarui, 2015;Shapiro and Walker, 2015; Andersen, 2016, among others).…”

Environmental Policy and Firm Selection in the Open Economy

“…a net reduction of supplying firms) that Andersen (2018) characterises as indirect welfare costs of regulation. Anouliès (2017) and Konishi and Tarui (2015) analyse the environmental and economic effects of an emissions trading scheme (ETS) with different forms of allocation rules. Tombe and Winter (2015) and Li and Sun (2015), in turn, derive differences between taxes and standards,…”