Taxes versus Standards (Again): Misallocation and Productivity Effects of Intensity Targets

Firm-level idiosyncratic policy distortions lower aggregate productivity, especially if such distortions are correlated with firm productivity. Many environmental policies, such as energy intensity standards, exhibit this correlation. In contrast to the existing environmental literature comparing taxes to standards, we explicitly consider distortions between a large number of heterogenous firms in multiple industries in a model that matches the industrial structure and energy use patterns of developed economies. We demonstrate taxes are always superior to intensity standards, especially standards that impose a common target on all firms. We also examine ways to mitigate the costs of standards.