The importance of policy neutrality for lowering greenhouse gas emissions

The second policy change to mitigate the economic costs of standards is to reduce the number of firms that are induced to exit. [...] We will demonstrate this claim formally in the next section, but for the moment, consider the following intuition: the share of output accounted for by energy will also be related to the effect that a change in the amount of energy inputs has on a firm’s total output. [...] The baseline energy intensity of each firm must be measured prior to the enactment of the regulations in order for a target to be formulated. [...] The greater the substitutability between within-industry goods, the lower the importance of any particular variety — since there are many substitutes — and the smaller the effect of firm exit on TFP. [...] To examine the effect of this type of policy, we use our model to find the threshold where the cumulative energy use of firms that exceed the threshold accounts for 50 per cent of total energy use in the economy.