Trade, emissions, and regulatory (non‐)compliance: Implications of firm heterogeneity

This paper provides the implications of firm heterogeneity for the environment. In autarky, raising emission tax generates an average productivity gain and favors efficient firms in the sense that their output expands. Although some of these efficient firms discharge more emissions, some may discharge less. While trade liberalization raises outputs, global emissions do not necessarily increase. A unilateral increase in emission tax not only decreases the outputs in this country but also decreases its average productivity under sufficiently high trade openness. Trade liberalization reduces global emissions under tax harmonization but it may generate more global emissions under tax competition.