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Differentiated products, increasing returns to scale and heterogeneous firms in a CGE model of the Australian coal sector


  • Waschik, Robert


We use a Computable General Equilibrium (CGE) model to re-evaluate the effects of the introduction of a tax on CO2 emissions in Australia after incorporating a number of important aspects of Australian coal production. While other studies (for example, Commonwealth of Australia (2008a), Clarke and Waschik (2012)) model coal as a single aggregate sector, we disaggregate coal into black and brown coals. Brown coal is non-traded while most black coal is exported, and brown coal has a higher emission intensity than black coal. Coal is a differentiated product whose production is characterized by the existence of very large fixed costs and considerable differences in the ratio of capital expenditures to capacity between coal mines, so we use Balistreri and Rutherford (2012) and Melitz (2003) to incorporate increasing returns to scale production technology and heterogeneous productivities between monopolistically competitive coal firms. We find that while the aggregate effects of achieving a given level of abatement are largely unaffected by disaggregation of coal, the effects within the black and brown coal sectors are very different. The introduction of increasing returns to scale and heterogeneous firms does have important effects on the aggregate welfare costs of achieving a given level of abatement. When monopolistically competitive coal producers face more inelastic demand, welfare costs rise, firm exit falls, and the carbon price needed to achieve a given level of abatement falls.

Suggested Citation

  • Waschik, Robert, 2015. "Differentiated products, increasing returns to scale and heterogeneous firms in a CGE model of the Australian coal sector," Energy Economics, Elsevier, vol. 51(C), pages 521-529.
  • Handle: RePEc:eee:eneeco:v:51:y:2015:i:c:p:521-529
    DOI: 10.1016/j.eneco.2015.08.019

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    References listed on IDEAS

    1. Peter Dixon & Michael Jerie & Maureen Rimmer, 2016. "Modern Trade Theory for CGE Modelling: The Armington, Krugman and Melitz Models," Journal of Global Economic Analysis, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University, vol. 1(1), pages 1-110, June.
    2. Harry Clarke & Robert Waschik, 2012. "Australia's Carbon Pricing Strategies in a Global Context," The Economic Record, The Economic Society of Australia, vol. 88(s1), pages 22-37, June.
    3. Balistreri, Edward J. & Hillberry, Russell H. & Rutherford, Thomas F., 2011. "Structural estimation and solution of international trade models with heterogeneous firms," Journal of International Economics, Elsevier, vol. 83(2), pages 95-108, March.
    4. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
    5. Alexeeva-Talebi, Victoria & Böhringer, Christoph & Löschel, Andreas & Voigt, Sebastian, 2012. "The value-added of sectoral disaggregation: Implications on competitive consequences of climate change policies," Energy Economics, Elsevier, vol. 34(S2), pages 127-142.
    6. Carolyn Fischer & Alan K. Fox, 2007. "Output-Based Allocation of Emissions Permits for Mitigating Tax and Trade Interactions," Land Economics, University of Wisconsin Press, vol. 83(4), pages 575-599.
    7. Venables, Anthony J, 1987. "Trade and Trade Policy with Differentiated Products: A Chamberlinian-Ricardian Model," Economic Journal, Royal Economic Society, vol. 97(387), pages 700-717, September.
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    Cited by:

    1. Elena Cefis & Cristina Bettinelli & Alex Coad & Orietta Marsili, 2022. "Understanding firm exit: a systematic literature review," Small Business Economics, Springer, vol. 59(2), pages 423-446, August.
    2. Michiel van Dijk & George Philippidis & Geert Woltjer, 2016. "Catching up with history: A methodology to validate global CGE models," FOODSECURE Technical papers 9, LEI Wageningen UR.
    3. Xiang, Hongjin & Kuang, Yanxiang & He, Hongbo & Yao, Shujie, 2022. "Could tariffs reduce overcapacity and environmental pollution? Evidence from China’s adjustment of tariffs on coal," Economic Analysis and Policy, Elsevier, vol. 75(C), pages 129-144.
    4. Yang, Zili, 2019. "Increasing returns to scale in energy-intensive sectors and its implications on climate change modeling," Energy Economics, Elsevier, vol. 83(C), pages 208-216.
    5. Liu, Lirong & Huang, Charley Z. & Huang, Guohe & Baetz, Brian & Pittendrigh, Scott M., 2018. "How a carbon tax will affect an emission-intensive economy: A case study of the Province of Saskatchewan, Canada," Energy, Elsevier, vol. 159(C), pages 817-826.
    6. Chen, Zi-yue & Nie, Pu-yan, 2016. "Effects of carbon tax on social welfare: A case study of China," Applied Energy, Elsevier, vol. 183(C), pages 1607-1615.

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    More about this item


    Carbon tax; Coal; Heterogeneous firms; Melitz model;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F18 - International Economics - - Trade - - - Trade and Environment
    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy


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