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Environmental Policy and Misallocation: The Productivity Effect of Intensity Standards

  • Trevor Tombe

    (University of Calgary)

  • Jennifer Winter

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 highproductivity firms to achieve. As the existing environmental literature does not examine these distortions, we model a large number of heterogenous firms in multiple industries with endogenous entry and exit. Our tractable model explicitly captures productivity losses from misallocated resources. Calibrated to US data, we show intensity standards can create large productivity losses from misallocation. We also examine ways to mitigate these costs.

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Paper provided by Department of Economics, University of Calgary in its series Working Papers with number 2013-29.

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Date of creation: 16 Oct 2014
Date of revision: 16 Oct 2014
Handle: RePEc:clg:wpaper:2013-29
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  1. Loren Brandt & Trevor Tombe & Xiaodong Zhu, 2012. "Factor Market Distortions across Time, Space and Sectors in China," Working Papers 262012, Hong Kong Institute for Monetary Research.
  2. Newell, Richard G & Stavins, Robert N, 2003. "Cost Heterogeneity and the Potential Savings from Market-Based Policies," Journal of Regulatory Economics, Springer, vol. 23(1), pages 43-59, January.
  3. Diego Restuccia & Dennis Tao Yang & Xiaodong Zhu, 2007. "Agriculture and Aggregate Productivity: A Quantitative Cross-Country Analysis," Working Papers e07-3, Virginia Polytechnic Institute and State University, Department of Economics.
  4. Ina Simonovska & Michael E. Waugh, 2011. "The Elasticity of Trade: Estimates and Evidence," NBER Working Papers 16796, National Bureau of Economic Research, Inc.
  5. Bohringer, Christoph & Rutherford, Thomas F., 1997. "Carbon Taxes with Exemptions in an Open Economy: A General Equilibrium Analysis of the German Tax Initiative," Journal of Environmental Economics and Management, Elsevier, vol. 32(2), pages 189-203, February.
  6. Buchanan, James M, 1969. "External Diseconomies, Corrective Taxes, and Market Structure," American Economic Review, American Economic Association, vol. 59(1), pages 174-77, March.
  7. Santosh Kumar Sahu & Krishnan Narayanan, 2011. "Total Factor Productivity and Energy Intensity in Indian Manufacturing: A Cross-Sectional Study," International Journal of Energy Economics and Policy, Econjournals, vol. 1(2), pages 47-58, September.
  8. Don Fullerton & Andrew Leicester & Stephen Smith, 2008. "Environmental Taxes," NBER Working Papers 14197, National Bureau of Economic Research, Inc.
  9. Shaffer, Sherrill, 1995. "Optimal Linear Taxation of Polluting Oligopolists," Journal of Regulatory Economics, Springer, vol. 7(1), pages 85-100, January.
  10. R. Simpson, 1995. "Optimal pollution taxation in a Cournot duopoly," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 6(4), pages 359-369, December.
  11. Dissou, Yazid & Mac Leod, Carolyn & Souissi, Mokhtar, 2002. "Compliance costs to the Kyoto Protocol and market structure in Canada: a dynamic general equilibrium analysis," Journal of Policy Modeling, Elsevier, vol. 24(7-8), pages 751-779, November.
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