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Environmental policy and misallocation: The productivity effect of intensity standards

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  • Tombe, Trevor
  • Winter, Jennifer

Abstract

Firm-level idiosyncratic policy distortions misallocate resources between firms, lowering aggregate productivity. Many environmental policies create such distortions; in particular, output-based intensity standards (which limit firms energy use or emissions per unit of output) are easier for high-productivity firms to achieve. We investigate the productivity effect of intensity standards using a tractable general-equilibrium model featuring multiple sectors and firm-level heterogeneity. Qualitatively, we demonstrate that intensity standards are always inferior to uniform taxes, as they misallocate both dirty and clean inputs across firms and sectors, which lowers productivity. Quantitatively, we calibrate the model to US data and show that these productivity losses can be large.

Suggested Citation

  • Tombe, Trevor & Winter, Jennifer, 2015. "Environmental policy and misallocation: The productivity effect of intensity standards," Journal of Environmental Economics and Management, Elsevier, vol. 72(C), pages 137-163.
    • Handle: RePEc:eee:jeeman:v:72:y:2015:i:c:p:137-163
    DOI: 10.1016/j.jeem.2015.06.002
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    Cited by:

    1. Yi Li & Lili Ding & Yongliang Yang, 2020. "Can the Introduction of an Environmental Target Assessment Policy Improve the TFP of Textile Enterprises? A Quasi-Natural Experiment Based on the Huai River Basin in China," Sustainability, MDPI, Open Access Journal, vol. 12(4), pages 1-19, February.
    2. Xu Dong & Yali Yang & Xiaomeng Zhao & Yingjie Feng & Chenguang Liu, 2021. "Environmental Regulation, Resource Misallocation and Industrial Total Factor Productivity: A Spatial Empirical Study Based on China’s Provincial Panel Data," Sustainability, MDPI, Open Access Journal, vol. 13(4), pages 1-20, February.
    3. Liu, Tiansen & Song, Yazhi & Xing, Xinpeng & Zhu, Yue & Qu, Zhengyu, 2021. "Bridging production factors allocation and environmental performance of China’s heavy-polluting energy firms: The moderation effect of financing and internationalization," Energy, Elsevier, vol. 222(C).
    4. Schaufele, Brandon, 2019. "Demand Shocks Change the Excess Burden From Carbon Taxes," MPRA Paper 92132, University Library of Munich, Germany.
    5. Udo Kreickemeier & Philipp M. Richter, 2019. "Environmental Policy and Firm Selection in the Open Economy," CESifo Working Paper Series 7725, CESifo.
    6. Yuping Deng & Yanrui Wu & Helian Xu, 2019. "Environmental Regulation and Export Product Quality: Evidence from Chinese Firms," Economics Discussion / Working Papers 19-14, The University of Western Australia, Department of Economics.
    7. Sarah Dobson & Jennifer Winter, 2018. "Assessing Policy Support for Emissions-Intensive and Trade-Exposed Industries," SPP Research Papers, The School of Public Policy, University of Calgary, vol. 11(28), October.
    8. Hochman, Gal & Zilberman, David, 2021. "Optimal environmental taxation in response to an environmentally-unfriendly political challenger," Journal of Environmental Economics and Management, Elsevier, vol. 106(C).
    9. Andersen, Dana C., 2016. "Accounting for Firm Exit and Loss of Variety in the Welfare Cost of Regulations," Working Papers 2016-9, University of Alberta, Department of Economics.
    10. 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.
    11. Liu, Xinghe & Xu, Huifeng & Lu, Meiting, 2021. "Do auditors respond to stringent environmental regulation? Evidence from China’s new environmental protection law," Economic Modelling, Elsevier, vol. 96(C), pages 54-67.

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    More about this item

    Keywords

    Energy intensity; Energy tax; Productivity;
    All these keywords.

    JEL classification:

    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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