This paper develops a neoclassical growth model with heterogeneous firms to study the effects of environmental policies. The model framework links the distribution of plants to an endogenous capital accumulation and technology adoption decision, making it the first to study both the timing of capital replacement and the endogenous movements in the plant distribution following environmental policy legislation. The main contribution is to demonstrate that the plant distribution should be of interest to policymakers. Short-run qualitative and quantitative responses to a carbon tax enactment vary depending upon whether or not plants vary in emission rates. Heterogeneous emission rates, a feature we show to be consistent with plant-level data, induce the economy’s average energy efficiency to rise following a carbon tax and imply dynamics that differ from a representative firm model. Policies that initially exempt older establishments and alternative revenue-recycling scenarios alter the short and long run effects.