Environmental policy and growth when inputs are differentiated in pollution intensity

Environmental policy affects the distribution of market shares if intermediate goods are differentiated in their pollution intensity. When innovations are environment-friendly, a tax on emissions skews demand towards new goods which are the most productive. In this case, the tax has to increase along a balanced growth path to keep the market shares of goods of different vintages constant. Comparing balanced growth paths, we find that an increase in the burden of environmental taxation spurs innovation because it increases the market share of recent vintages. As a result the cost of environmental policy in terms of slower growth is weaker and may even be absent.

Firms reaction to environmental regulation

International agreements arising from the need to deal with the global warming promoted by countries decided to embrace a climate change policy bring on the debate of the impacts on firms in a global competitive market. Facing, therefore, different environmental standards accordingly to firm’s physical location. Once European Union is taking the lead in adopting stringent environmental regulation, this study aims to assess the impact of environmental regulations on firms in Europe. A novel database was constructed providing firm-level air pollution emission information in the European Union. Using difference-in-difference model, the effect of the intervention of EU environmental policy change suggests a negative response in fixed assets among EU firms due to the 2006 EU policy. The evidence to the hypothesis that firms in European Union have been decreasing its firms fixed assets, as a proxy of production capacity, with the change in environmental regulation, provides general support for the PHH, however, it doesn’t remain in robustness checks. The contribution of this work is bringing a revisited view of the actual effect of environmental regulation based on Kyoto Protocol directives on European firms.