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Heterogeneous firms and the environment: a cap-and-trade program

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  • Lisa Anouliès

    (Université Paris-Sud, RITM)

Abstract

Cap-and-trade programs are presently the cornerstone of climate change policies and proposals in many countries. I investigate the economic and environmental effects of different designs for this policy in a general equilibrium setting when firms are heterogeneous and in monopolistic competition. This study first predicts that the cap on emissions perfectly defines the environmental quality but has no effect on firms’ profits and decisions to enter or exit the market. On the contrary, increasing the share of free allocation of emissions allowances reallocates resources among firms toward the most productive ones: the initial allocation of allowances therefore impacts firms’ entry and exit decisions and aggregate economic variables but not the environment. Firm heterogeneity magnifies this economic effect of a change in the initial allocation of allowances.

Suggested Citation

  • Lisa Anouliès, 2015. "Heterogeneous firms and the environment: a cap-and-trade program," Working Papers 2015.10, FAERE - French Association of Environmental and Resource Economists.
  • Handle: RePEc:fae:wpaper:2015.10
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    3. María A. Ramón-Jerónimo & Inés Herrero, 2017. "Capturing Firms’ Heterogeneity through Marketing and IT Capabilities in SMEs," Sustainability, MDPI, vol. 9(12), pages 1-25, November.
    4. Forslid, Rikard & Okubo, Toshihiro & Ulltveit-Moe, Karen Helene, 2018. "Why are firms that export cleaner? International trade, abatement and environmental emissions," Journal of Environmental Economics and Management, Elsevier, vol. 91(C), pages 166-183.
    5. Yu, Song-min & Fan, Ying & Zhu, Lei & Eichhammer, Wolfgang, 2020. "Modeling the emission trading scheme from an agent-based perspective: System dynamics emerging from firms’ coordination among abatement options," European Journal of Operational Research, Elsevier, vol. 286(3), pages 1113-1128.
    6. Gregor Zoettl, 2021. "Emission trading systems and the optimal technology mix," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 12(2), pages 281-327, June.
    7. 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.
    8. Sun, YongPing & Xue, JinJun & Shi, XunPeng & Wang, KeYing & Qi, ShaoZhou & Wang, Lei & Wang, Cheng, 2019. "A dynamic and continuous allowances allocation methodology for the prevention of carbon leakage: Emission control coefficients," Applied Energy, Elsevier, vol. 236(C), pages 220-230.
    9. Kong, Dongmin & Ma, Guangyuan & Qin, Ni, 2022. "The political economy of firm emissions: Evidence from a quasi-natural experiment in China," European Journal of Political Economy, Elsevier, vol. 75(C).
    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. Li, Qian & Zhou, Ruodan & Xiong, Jie & Wang, Yanxi, 2023. "Rushing through the clouds, or waiting to die? The effect of the green credit policy on heavily polluting firms," The North American Journal of Economics and Finance, Elsevier, vol. 64(C).
    12. Hamaguchi, Yoshihiro, 2023. "Environmental tax evasion as a determinant of the Porter and pollution haven hypotheses in a corrupt political system," Economic Analysis and Policy, Elsevier, vol. 79(C), pages 610-633.
    13. Shobande, Olatunji A. & Ogbeifun, Lawrence & Tiwari, Aviral Kumar, 2024. "Extricating the impacts of emissions trading system and energy transition on carbon intensity," Applied Energy, Elsevier, vol. 357(C).
    14. Yoshihiro Hamaguchi, 2024. "Whether to Abolish or Introduce Dual Regulation as Trade and Environmental Policy?," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 32(1), pages 57-95, January.
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    More about this item

    Keywords

    Emissions trading; Heterogeneous firms; Monopolistic competition;
    All these keywords.

    JEL classification:

    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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