Robust Policies Against Emission Leakage: The Case for Upstream Subsidies

35 Pages Posted: 8 May 2014

See all articles by Carolyn Fischer

Carolyn Fischer

Resources for the Future

Mads Greaker

Statistics Norway

Knut Einar Rosendahl

Norwegian University of Life Sciences; Statistics Norway - Research Department

Date Written: April 8, 2014

Abstract

Asymmetric regulation of a global pollutant between countries can alter the competitiveness of industries and lead to emissions leakage, which hampers countries’ welfare. In order to limit leakage, governments consider supporting domestic trade exposed firms by subsidizing their investments in abatement technology. The suppliers of such technologies tend to be less than perfectly competitive, particularly when both emissions regulations and advanced technologies are new. In this context of twin market failures, we consider the relative effects and desirability of subsidies for abatement technology. We find a more robust recommendation for upstream subsidies than for downstream subsidies. Downstream subsidies tend to increase global abatement technology prices, reduce pollution abatement abroad and increase emission leakage. On the contrary, upstream subsidies reduce abatement technology prices, and hence also emissions leakage. Moreover, as opposed to downstream subsidies, they provide domestic abatement technology firms with a strategic advantage.

Keywords: strategic environmental policy, carbon leakage, abatement technology

JEL Classification: Q540, Q550

Suggested Citation

Fischer, Carolyn and Greaker, Mads and Rosendahl, Knut Einar, Robust Policies Against Emission Leakage: The Case for Upstream Subsidies (April 8, 2014). CESifo Working Paper Series No. 4742. Available at SSRN: https://ssrn.com/abstract=2434420

Carolyn Fischer

Resources for the Future ( email )

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HOME PAGE: http://www.rff.org/~fischer

Mads Greaker (Contact Author)

Statistics Norway ( email )

N-0033 Oslo
Norway

Knut Einar Rosendahl

Norwegian University of Life Sciences ( email )

PO Box 5033
NO-1432 Aas
Norway
+47 64966117 (Phone)

Statistics Norway - Research Department ( email )

Kongens Gt. 6
PO Box 8131 Dep
N-0033 Oslo
Norway
+47 21094954 (Phone)
+47 21094963 (Fax)

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