Abstract: The effectiveness of emission trading depends on how quota constraints shape emission-right prices and how these prices further affect firms’ technology adoption, output decisions, individual emissions, and aggregate emissions. This paper examines how heterogeneity in firms’ baseline pollution intensity affects their choices of emission-reduction technology under an emission trading mechanism, how these technology choices influence output decisions and market-level pollution emissions, and how the optimal total quota can be determined from the perspective of social welfare maximization. To address these questions, this paper constructs a profit-maximization model for heterogeneous firms under emission trading. By comparing firms’ optimal profits with and without technology adoption, the paper derives the conditions under which firms choose emission-reduction technology. The results show that technology adoption is heterogeneous across firms: firms with intermediate pollution intensities are more likely to adopt emission-reduction technology, whereas firms with relatively low or high pollution intensities do not adopt it. Based on these technology adoption intervals, the paper derives firms’ optimal output under different technology choices, calculates individual emissions according to firms’ post-choice pollution intensity and optimal output, and aggregates individual emissions to obtain total market emissions. The results indicate that emission-reduction technology does not necessarily reduce aggregate pollution emissions. When the reduction in unit emissions is sufficient to offset the additional emissions caused by output expansion, technology adoption generates a technological emission-reduction effect; otherwise, it leads to a pollution rebound effect. The output analysis further shows that aggregate output decreases as the equilibrium price of emission rights increases, while the effect of the post-adoption emission coefficient on aggregate output depends on market conditions. The paper further incorporates consumer surplus, firm profits, and environmental damage into a social welfare maximization framework to derive the optimal total quota and its endogenous relationship with the equilibrium price of emission rights. By linking quota constraints, emission-right price formation, heterogeneous technology adoption, output adjustment, aggregate emissions, and optimal quota design, this paper provides a theoretical explanation for heterogeneous firm responses and pollution rebound under emission trading, and offers implications for improving quota allocation, price formation, and pollution rebound prevention.

Key words: emissions trading, total control, technological innovation, pollution rebound effect