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Emission taxes and standards in a general equilibrium with entry and exit

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  • Li, Zhe
  • Sun, Jianfei

Abstract

This paper studies and compares the welfare effects of emission taxes and emission standards in a general equilibrium model with two sectors in which plants can freely enter and exit. In one of the sectors plants differ in their productivity, produce differentiated goods, and generate emissions that can be reduced using an abatement technology. An emission reduction policy causes resource reallocation among plants and across sectors in two ways: a static way due to the dispersion of productivity and a dynamic way due to entry and exit. The model shows that the static distributional effect favors the emission tax, while the dynamic distributional effect favors the emission standard. Calibrated to Canadian data, the model shows that the dynamic effect dominates the static one and hence the emission standard dominates the emission tax in terms of welfare. This is the case not only in the baseline model, but also in a model with a large variation of parameter values for productivity dispersion, market power, and abatement efficiency.

Suggested Citation

  • Li, Zhe & Sun, Jianfei, 2015. "Emission taxes and standards in a general equilibrium with entry and exit," Journal of Economic Dynamics and Control, Elsevier, vol. 61(C), pages 34-60.
    • Handle: RePEc:eee:dyncon:v:61:y:2015:i:c:p:34-60
    DOI: 10.1016/j.jedc.2015.09.001
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    3. Francesco Lamperti & Mauro Napoletano & Andrea Roventini, 2015. "Preventing environmental disasters : Market based vs command and control policies," Sciences Po Economics Publications (main) hal-03459560, HAL.
    4. Li, Haoyang & Wu, Nan & Zhao, Jinhua, 2025. "Markup dispersion, industry coverage and the cost of environmental regulation," Journal of Environmental Economics and Management, Elsevier, vol. 130(C).
    5. Mascarúa, Miguel & Montañez-Enríquez, Ricardo, 2025. "Climate change and technology adoption with a large informal sector," Latin American Journal of Central Banking (previously Monetaria), Elsevier, vol. 6(3).
    6. Lamperti, Francesco & Napoletano, Mauro & Roventini, Andrea, 2020. "Green Transitions And The Prevention Of Environmental Disasters: Market-Based Vs. Command-And-Control Policies," Macroeconomic Dynamics, Cambridge University Press, vol. 24(7), pages 1861-1880, October.
    7. repec:spo:wpmain:info:hdl:2441/7sphp94klp8558f8pgpqbb6ubt is not listed on IDEAS
    8. Anouliès, Lisa, 2017. "Heterogeneous firms and the environment: a cap-and-trade program," Journal of Environmental Economics and Management, Elsevier, vol. 84(C), pages 84-101.
    9. Schaufele, Brandon, 2019. "Demand Shocks Change the Excess Burden From Carbon Taxes," MPRA Paper 92132, University Library of Munich, Germany.
    10. Hang, Jing & Wang, Miaojun & Zhou, Mohan, 2025. "Productivity implications of inefficient environmental regulation: Evidence from China," China Economic Review, Elsevier, vol. 90(C).
    11. Hartmut Egger & Udo Kreickemeier & Philipp M. Richter, 2021. "Environmental Policy and Firm Selection in the Open Economy," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 8(4), pages 655-690.
    12. Li, Zhe & Lyu, Pinjie & Sun, Jianfei, 2025. "Environmental regulation and equilibrium unemployment in China: Evidence from a multiple-sector search and matching model," China Economic Review, Elsevier, vol. 89(C).
    13. Li, Haoyang & Wu, Nan, 2022. "Emission pricing, emission rebound, and the coverage scope of incomplete regulations," Journal of Environmental Economics and Management, Elsevier, vol. 113(C).
    14. Hirose, Kosuke & Ishihara, Akifumi & Matsumura, Toshihiro, 2024. "Tax versus regulations: Polluters’ incentives for loosening industry emission targets," Energy Economics, Elsevier, vol. 136(C).
    15. Hirose, Kosuke & Ishihara, Akifumi & Matsumura, Toshihiro, 2021. "Tax versus Regulations: Robustness to Polluter Lobbying Against Near-Zero Emission Targets," MPRA Paper 108380, University Library of Munich, Germany.
    16. Dana C. Andersen, 2016. "Accounting for Firm Exit and Loss of Variety in the Welfare Cost of Regulations," Working Papers 2016-09, University of Alberta, Department of Economics.
    17. Andersen, Dana C., 2018. "Accounting for loss of variety and factor reallocations in the welfare cost of regulations," Journal of Environmental Economics and Management, Elsevier, vol. 88(C), pages 69-94.
    18. Ino, Hiroaki & Matsumura, Toshihiro, 2021. "Optimality of emission pricing policies based on emission intensity targets under imperfect competition," Energy Economics, Elsevier, vol. 98(C).

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    JEL classification:

    • E69 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Other

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