Efficiency and Redistribution in Environmental Policy: An Equilibrium Analysis of Agricultural Supply Chains

Abstract

I build an empirical model of the South American agricultural sector to show how environmental policy is transmitted along a supply chain when regulation at the externality’s source is infeasible. Given obstacles to a first-best carbon tax on farmers, I show how second-best alternatives—downstream agribusiness taxes—reduce upstream emissions, but their effectiveness is limited by poor targeting while also being regressive. Agribusiness monopsony power worsens targeting by lowering pass-through to upstream farmers in uncompetitive and emissions-intense regions, thus eroding the Pigouvian signal where social cost is highest. By contrast, small-scale but well-targeted upstream interventions perform robustly when markets face preexisting distortions.