Climate change mitigation necessitates the implementation of stringent environmental regulations to control emissions of greenhouse gases. For instance, the successful implementation of the 2030 climate and energy targets in EU requires at least 40% cuts in greenhouse gas emissions (from 1990 levels) and 27% improvement in energy efficiency. The 40% target will only be achieved if EU emissions trading system sectors (ETS) cut emissions by 43% and non-ETS cut emissions by 30% (compared to 2005). The ETS has to be reformed in order to achieve the first target, while achieving the second target requires that Member States implement additional measures to cut emissions and increase the energy efficiency of the non-ETS sectors.  The potential impacts of strict environmental policies on employment, production costs and firms’ competitiveness are central to the choice of which policy to implement. Not all the industries will be affected in the same way. For instance, energy-intensive industries that emit larger quantities of greenhouse gases face higher costs from environmental regulations that require firms to pay for the cost of emissions, which can undermine their competitiveness to a greater extent than non energy-intensive industries (see e.g. Aldy and Pizer, 2015; Alexeeva-Talebi et al., 2012). Furthermore, not all the firms in an industry will be affected in the same way. In particular, small firms might be at a disadvantage if there are scale economies in regulatory compliance. In such a case, it might be optimal to exempt or impose lighter regulatory burden on smaller firms, or design regulations that are neutral across firm size to minimize the disproportionate impact of environmental regulatory requirements on small businesses (e.g., Brock and Evans, 1985). In this paper, we investigate the effects of the choice of policy instruments on the size distribution of firms when compliance with environmental regulation changes the optimal plant size. By this means, we contribute to the understanding of the differential effect of regulation across firm size, which is important since societies often have an interest in preserving small businesses because of antitrust or other noneconomic reasons (see e.g., Evans, 1986). Furthermore, understanding the incidence of regulatory costs across firm size allows us to anticipate the interest of certain groups of businesses in supporting alternative regulatory policies. Our paper compares three broadly used environmental policies, namely emission taxes, emission standards, and performance standards. We show that unlike emission taxes and performance standards, emission standards induce regulatory asymmetries favoring small firms. Moreover, unlike previous studies suggesting that market-based instruments create more effective technology adoption incentives than conventional regulatory standards, our results indicate that when the regulatory asymmetries created by emissions standards are taken into account, the profitability of emission saving biased technological change is higher under emission standards than under market-based instruments.