Mitigating Climate Change at the Firm Level: Mind the Laggards

We document significant within-industry heterogeneity in environmental performance across firms globally and across sectors. We find that this heterogeneity is in part driven by newer capital-embedded technologies and intangible investments that raise productivity. We propose a multi-sector heterogeneous-firm general equilibrium model which endogenizes these novel determinants and matches the extent and drivers of firm heterogeneity. Calibrated simulations for several countries reveal the importance of adoption of newer capital-embedded technologies in lowering the costs of mitigation policies. We highlight the trade-off between short-term costs and long-term benefits of subsidies for capital upgrading.