We incorporate emission into a general equilibrium model with rich dispersion in productivity among monopolistically competitive plants. Emission is modeled as a by-product of goods production. An abatement technology is available to the plants for reducing emission. We compare an emission tax with an emission intensity standard. The tax is shown to dominate the standard in welfare for all values of market power if either productivity is sufficiently dispersed or the abatement technology is not effective. On the other hand, if productivity dispersion is small and the abatement technology is effective, there exists sufficiently strong market power so that the standard will dominate the tax in welfare. Even in the case where the standard unambiguously induces a higher output of dirty goods than the tax, the general equilibrium framework is necessary for ranking the two policies in welfare.

New technology has been credited with solving environmental problems by mitigating the effects of pollutants. We construct a general equilibrium model in which abatement technology is a real option and pollution's (negative) amenity value alters both risk aversion and the intertemporal elasticity of substitution. We derive the tax scheme such that in a decentralized economy agents adopt the abatement technology at the time that is socially optimal. We show that the higher the greenness of preferences, the earlier the adoption and the higher the optimal tax rate. We also obtain that adoption is fostered by uncertainty if the effective intertemporal elasticity of substitution is large enough, but is not affected by uncertainty if this elasticity is low. Moreover, the optimal tax rate, which only exists if the effective intertemporal elasticity of substitution is high, is an increasing function of uncertainty.