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Environmental Policy with Heterogeneous Plants (No. E2009001)


Zhe Li and Jianfei Sun*

Abstract:We show that accounting for plant heterogeneity is important for the evaluation of environmental policies. We develop a general equilibrium model in which monopolistic competitive plants di¤er in productivity, produce di¤erentiated goods and optimally choose a discrete emission-reduction technology. Calibrated to the Canadian data, the model shows two main results. First, the aggregate costs of using an emission tax to re- duce 20% of current emissions are twice as large as what would result with homogenous plants due to the selection of an abatement technology. Second, an emission standard outperforms an emission tax since the tax causes price distortions.
Keywords: General Equilibrium, Heterogeneous Plants, Environmental Policy, Abatement Technology

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* Li: Department of Economics University of Toronto, 150 St. George Street, Toronto, M5S3G7, Sun: College of Business Administration, University of Novada - Reno, #0028 Reno, NV, 89557-0206, Acknowledgements: we thank Shouyong Shi, Diego Restuccia, and Miquel Faig for guidance and inspiring suggestions. We have also bene…ted from comments and suggestions from Xiaodong Zhu, Luisa Fuster, Gueorgui Kambourov, Mathew Turner, Angelo Melino, Margarida Duarte, Don Dewees, Elena Capatina, Juan Ilerbaing and many other seminar participants at University of Toronto, Univeristy of Guelph, the North American Summer Meetings of the Econometric Society (NASM 2009), the 9th conference of the Society of the Advancement of Economic theory (SAET 2009) on Current Trends in Economics, the 41th Canadian Economonic Association (CEA 2007) annual meeting, and the 18th Canadian Resource and Environmental Economics Study Group (CREE 2008) annual meeting. All remaining errors are our own.