Prices versus quantities in a vintage capital model

The heterogeneity of the available physical capital with respect to productivity and emissionintensity is an important factor for policy design, especially in the presence of emissionrestrictions. In a vintage capital model, reducing pollution requires to change the capitalstructure through investment in cleaner machines and to scrap the more polluting ones. Insuch a setting we show that emission tax and auctioned emission permits may yieldcontrasting outcomes. We also show that some failures in the permits market may undermineits efficiency and that imposing the emission cap over longer periods plays a regularizing rolein the market....