Carbon tax vs. emission trading in a monopolistically competitive market with heterogeneous firms

Kefu Lin (), Rui Pan () and Dao-Zhi Zeng ()
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Kefu Lin: Tokai University
Rui Pan: Tohoku University

The Annals of Regional Science, 2024, vol. 73, issue 2, No 12, 825-848

Abstract: Abstract We establish a general-equilibrium model to compare the efficiency of two emission regulation policies used worldwide: the carbon tax (CT) and the emission trading scheme (ETS). Assuming monopolistic competition and heterogeneous firms, we show that the ETS is better in an economy with a high degree of heterogeneity, and the CT is better otherwise. We also explore how the market distortions under these two regulation policies are different. Moreover, we find that the excessive input of an immobile resource in manufacturing production may result in market inefficiency.

JEL-codes: H23 L11 Q50 Q52 Q58 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s00168-023-01249-8

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