Environmental Policy and the Size Distribution of Firms

Abstract

In this paper we analyze the e¤ects of environmental policies on the size distribution of …rms.We model a stationary industry where the observed size distribution is a solution to the pro…t maximization problem of heterogeneous …rms that di¤er in terms of their energy e¢ ciency. We compare the equilibrium size distribution under emission taxes, uniform emission standards, and performance standards. Our results indicate that, unlike emission taxes and performance standards, emission standards introduce regulatory asymmetries favoring small …rms. These asymmetries cause signi…cant detrimental e¤ects on total output and total welfare, yet lead to reduced emissions and help preserve small businesses.

No net zero without SMEs

“…Likewise, (Irvine and Moore, 2018 [118]) show that a lack of knowledge on the advantages of environmental management systems and inefficient energy and resource planning are important causes of the environmental footprint of SMEs, and propose an online toolkit of energy and waste management tools that can help address this and foster circular economy business models and planning. (Commission for Environmental Cooperation, 2005 [119]) document the usage of environmental management systems by SMEs in Canada, Mexico and the US, and government efforts to promote these. The report concludes that: 'Most SMEs face few incentives and many difficulties in implementing environmental management systems.…”

“…118 However, data that distinguish energy use or efficiency of buildings according to the size of their occupant are currently limited, although information is growing. 119 Policies to support green building currently are primarily directed to households, not so much to (smaller) companies. The assumption underlying this is that companies (more than household) would be able to invest in the retrofitting of buildings on the basis of expected return in energy savings.…”

“…See also upcoming work on building energy efficiency in cities and regions (https://www.oecd.org/cfe/cities/energy-efficiency-cities.htm).117 https://www.oecd.org/cfe/cities/energy-efficiency-cities.htm 118 https://www.smartcitiesdive.com/ex/sustainablecitiescollective/expansion-green-buildings-small-business-sector/1295452/119 For instance, the EEFIG database DEEP includes various examples of investments in green building (https://deep.eefig.eu/). The OECD has launched a survey to assess green building and measures taken to boost this across countries.…”