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 passthrough 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.