Firm Heterogeneity, Industry Dynamics and Climate Policy
Ara Jo () and
Christos Karydas ()
Additional contact information
Ara Jo: Department of Economics, University of Bath, 3 East, BA2 7AY, Bath, United Kingdom
Christos Karydas: Center of Economic Research, ETH Zurich, Zurichbergstrasse 18, 8092 Zurich, Switzerland
No 23/378, CER-ETH Economics working paper series from CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich
Abstract:
We develop a dynamic general equilibrium model to quantify the interaction between climate policy, industry dynamics, and the elasticity of substitution between clean and dirty energy in the economy. The model incorporates empirical observations that firms differ substantially in their potential for energy substitution and that the economy is growing more capable of substituting clean for dirty energy over time as environmental regulation becomes more stringent. Our model highlights the effect of dynamic industry response on increasing the average elasticity of substitution in the economy due to the exit of least flexible firms in response to climate policy. The higher average elasticity of substitution increases the effectiveness of the policy at reducing emissions, resulting in a 35 percent decrease in the size of the carbon tax required to achieve carbon neutrality
Keywords: industry dynamics; elasticity of substitution; climate policy (search for similar items in EconPapers)
JEL-codes: O33 Q40 Q54 Q55 (search for similar items in EconPapers)
Pages: 54 pages
Date: 2023-01
New Economics Papers: this item is included in nep-dge, nep-ene, nep-env and nep-tid
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Persistent link: https://EconPapers.repec.org/RePEc:eth:wpswif:23-378
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