Journal of the Association of Environmental and Resource Economists: Cournot, Pigou, and Ricardo walk in a bar — Unilateral environmental policy and leakage with market power and firm heterogeneity.
We study the determinants of emission leakage using a two-country general equilib-rium model with heterogeneous firms and Cournot competition. We show that firmsfrom the non-regulating country respond to the implementation of Pigouvian emissiontaxes on their competitors abroad and the subsequent gain in comparative advantageby increasing markups rather than output. We find that this effect, jointly with theexit of the least productive and most emission-intensive firms, can provoke a reduc-tion of emissions in the non-regulating country and thus increase the effectiveness ofthe unilateral emission tax. Border emission taxes dampen the market power gains ofnon-regulated firms and thus reduce the effectiveness of a unilateral emission tax.
Baccianti, C. & Schenker, O. (2022). Cournot, Pigou, and Ricardo walk in a bar: Unilateral environmental policy and leakage with market power and firm heterogeneity, Journal of the Association of Environmental and Resource Economists, in press. https://www.journals.uchicago.edu/doi/abs/10.1086/719938
