Environmental policy and misallocation: The productivity effect of intensity standards |
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| Institution: | 1. UNE Business School, University of New England, Armidale, NSW 2351, Australia;2. Institute of Rural Futures, University of New England, Armidale, NSW 2351, Australia;3. AGL Energy Ltd., Level 22, 101 Miller Street, North Sydney, NSW 2060, Australia;1. Board of Governors of the Federal Reserve System and CEMAPRE, United States;2. Banco de Portugal (Research Department), Portugal;3. International Monetary Fund, United States;1. State Key Laboratory of Pollution Control & Resource Reuse, School of Environment, Nanjing University, Nanjing 210023, P R China;2. School of Government, Nanjing University, Nanjing 210093, PR China;3. School of Business, Nanjing University, Nanjing 210023, P R China;4. Hopkins Nanjing Center, Nanjing 210023, P R China |
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| 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. |
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| Keywords: | Energy intensity Energy tax Productivity |
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