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Unilateral Carbon Pricing and Heterogeneous Firms

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  • Robin Sogalla

Abstract

Several empirical studies document the relevance of firm heterogeneity to assess the effect of trade and environmental policy. This paper develops a multi-country and -sector general equilibrium trade model with heterogeneous firms and analyzes the effect of domestic carbon pricing as well as carbon border adjustments. In the presence of heterogeneous firms, these unilateral carbon pricing tools affect the emission intensity both via within- and across-firm adjustments. I show that the across-firm reallocation of market shares can be quantified ex-ante using publicly available data on the share of exporting firms. Applying the model to EU climate policy, I find that emission reductions arise mainly through a lower emission intensity of production within firms, while the reallocation channel is negligible. Scale economies aggravate the output loss of emission-intensive manufacturing and the reduction of real income due to more stringent climate policy, but increase the effectiveness of border adjustments to counter carbon leakage. The selection of heterogeneous plays a more limited role for aggregate effects.

Suggested Citation

  • Robin Sogalla, 2023. "Unilateral Carbon Pricing and Heterogeneous Firms," Discussion Papers of DIW Berlin 2060, DIW Berlin, German Institute for Economic Research.
    • Handle: RePEc:diw:diwwpp:dp2060
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    File URL: https://www.diw.de/documents/publikationen/73/diw_01.c.887585.de/dp2060.pdf
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    References listed on IDEAS

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    1. Dominick Bartelme & Arnaud Costinot & Dave Donaldson & Andrés Rodríguez-Clare, 2025. "The Textbook Case for Industrial Policy: Theory Meets Data," Journal of Political Economy, University of Chicago Press, vol. 133(5), pages 1527-1573.
    2. Mahlkow, Hendrik & Wanner, Joschka, 2022. "The Carbon Footprint of Global Trade Imbalances," Conference papers 333482, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    3. Jared C. Carbone & Nicholas Rivers, 2017. "The Impacts of Unilateral Climate Policy on Competitiveness: Evidence From Computable General Equilibrium Models," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 11(1), pages 24-42.
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    5. repec:spo:wpmain:info:hdl:2441/6apm7lruv088iagm4rv2c33jtg is not listed on IDEAS
    6. Niven Winchester, 2012. "The Impact of Border Carbon Adjustments Under Alternative Producer Responses," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 94(2), pages 354-359.
    7. Richter, Philipp M. & Schiersch, Alexander, 2017. "CO2 emission intensity and exporting: Evidence from firm-level data," European Economic Review, Elsevier, vol. 98(C), pages 373-391.
    8. Aaron Cosbey & Susanne Droege & Carolyn Fischer & Clayton Munnings, 2019. "Developing Guidance for Implementing Border Carbon Adjustments: Lessons, Cautions, and Research Needs from the Literature," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 13(1), pages 3-22.
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    Cited by:

    1. Robin Sogalla & Joschka Wanner & Yuta Watabe, 2024. "New Trade Models, Same Old Emissions?," CESifo Working Paper Series 11596, CESifo.
    2. Qian, Zeyi & Suzuki, Kensuke & Zhang, Junfu, 2026. "Trade Costs, Entry Costs, and Regional Economic Growth in China," IZA Discussion Papers 18507, IZA Network @ LISER.

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    Keywords

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    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F18 - International Economics - - Trade - - - Trade and Environment
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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