Abstract
I show how the exemption of small-scale emitting firms from emissions pricing results in within-country emissions leakage — an emissions price increase for the regulated firms prompts an increase in the emissions of the unregulated. I use a heterogeneous firm model in which a fixed share of firms is subject to emissions pricing. The firms at the lower part of the productivity distribution benefit from being exempted, such that the higher the emissions price, the more and dirtier firms can survive in the domestic market. Leakage is stronger if firms are exempted only if they emit less than a fixed threshold (as for the EU Emission Trading System) because some firms strategically bunch below the threshold, making the emissions price an even weaker tool to reduce total emissions. In environments with low social costs of emission or high fixed regulatory costs, an exemption may be justified; over time, however, the criteria for exemptions should be adjusted accordingly.
Original language | English |
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Article number | 102933 |
Number of pages | 22 |
Journal | Journal of Environmental Economics and Management |
Volume | 124 |
DOIs | |
Publication status | Published - Mar 2024 |
Bibliographical note
Publisher Copyright:© 2024 The Author(s)
Funding
This research did not receive any specific grant from funding agencies in the public, commercial, or not-for-profit sectors. I am grateful for the comments by Erik Ansink, Carolyn Fischer, Natalie Kessler, Gerard van der Meijden, Joëlle Noailly, Sacha den Nijs, Cees Withagen, and two anonymous referees. Further, I would like to thank Christoph Böhringer, Laura Hering, Knut Einar Rosendahl, Thomas Sterner, Ulrich Wagner, and other discussants and participants at SURED 2022, EAERE 2022, Microeconomics Group of the European University Institute, and internal department seminars (VU) for helpful comments and conversations.
Funders | Funder number |
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Cees Withagen | |
Knut Einar Rosendahl | |
Laura Hering | |
European University Institute |
Keywords
- Asymmetric emissions pricing
- Emissions leakage
- Heterogeneous firms
- Monopolistic competition