Heterogeneous firms, exports and pigouvian pollution tax: Does the abatement technology matter?

Abstract

Environmental regulations aim at influencing individual behaviour toward more efficient use of resources and adoption of greener technologies for a sustainable development of globalized economies. This work investigates how and to what extent firms are influenced by an environmental Pigouvian tax on their technology and trade decisions. By using an international trade model with monopolistic competition that accounts for the heterogeneity of firms in terms of productivity, it is theoretically examined the decision of introducing a green technology or keeping a pollutant less advanced technology. If all firms adopt a pollutant technology, the eco-tax lowers emissions through a selection mechanism because the least productive firms are forced to leave the market. By imposing higher compliance costs to active firms, export propensity is negatively influenced as well. When abatement technologies can be adopted, an additional source of pollution reduction is obtained. The environmental tax will positively affect eco-innovation propensity and, indirectly, export propensity. However, since the positive effect will strictly depend on the amount of firm productivity, environmental tax and costs of clean technology, the Pigouvian tax can foster eco-innovation across the largest and most productive firms only. Productivity enhancing policies tailored to firm characteristics, especially size, may be more successful in the diffusion of cleaner technologies across all firms.