This paper analyses the adoption of energy-efficiency enhancing technologies by heterogeneous firms. The fact that energy use does not only cause external environmental costs through pollution, but also directly affects the profitability of the firm and hence its behaviour on input and output...

The extant literature has paid scant theoretical attention to the tripartite interaction between increasing environmental regulations, the resulting decision by a polluting firm to upgrade its capital stock, and the impact of innovation on this capital stock improvement decision. Hence, we...