Productivity Dispersion across Plants, Emission Abatement and Environmental Policy

Empirical studies suggest systematic relationships between plants productivity and plants emissions and emission-abatement costs. This paper demonstrates that productivity disper-sion across plants is an important factor that inuences the transmission of environmental policy. Within a general equilibrium framework, I model heterogeneous polluting plants by allowing them to be di¤ering in productivity and to choose optimally a discrete emission-reduction technology taking into account both the costs of reducing emissions and the com-petition in the goods market. An emission-reduction policy a¤ects the distribution of plants with the advanced abatement technology and relocates resources and market shares across plants. As a result, the aggregate e¤ects of an environmental policy depend on the degree of productivity dispersion. Using Canadian data, I show quantitatively that the aggregate e¤ects of an environmental policy signi\u85cantly a¤ected by the degree of productivity dispersion both in the transition periods and in the long-run steady-state equilibrium