Environmental Subsidies to Mitigate Net-Zero Transition Costs

47 Pages Posted: 25 May 2022 Last revised: 21 Feb 2024

See all articles by Eric Jondeau

Eric Jondeau

University of Lausanne - Faculty of Business and Economics (HEC Lausanne); Swiss Finance Institute; Swiss Finance Institute

Gregory Levieuge

Banque de France

Jean-Guillaume Sahuc

Banque de France; Université Paris Ouest - Nanterre, La Défense - EconomiX

Gauthier Vermandel

CMAP, Ecole polytechnique, Institut Polytechnique de Paris; LEDa, Paris-Dauphine & PSL Universities; Banque de France

Date Written: May 25, 2022

Abstract

Imperfect competition in the pollution abatement equipment sector is a distortion that could impede the achievement of Paris Agreement objectives. We find that environmental subsidies, fully financed by a carbon tax, are an effective tool to promote firm entry into this sector and reduce the costs of abatement equipment required by other companies to lower their carbon footprints. Using a quantitative macro-climate model featuring an endogenous market structure for abatement equipment, we estimate that optimally allocating subsidies between startups (60%) and existing companies (40%) could save nearly $2.9 trillion in world GDP annually by 2060.

Keywords: Climate change, macro-climate model, pollution abatement goods sector, imperfect competition, endogenous market structure, Bayesian estimation

JEL Classification: C32, E32, H23, Q50, Q58

Suggested Citation

Jondeau, Eric and Levieuge, Gregory and Sahuc, Jean-Guillaume and Vermandel, Gauthier, Environmental Subsidies to Mitigate Net-Zero Transition Costs (May 25, 2022). Swiss Finance Institute Research Paper No. 22-45, Available at SSRN: https://ssrn.com/abstract=4119680 or http://dx.doi.org/10.2139/ssrn.4119680

Eric Jondeau (Contact Author)

University of Lausanne - Faculty of Business and Economics (HEC Lausanne) ( email )

Extranef 232
Lausanne, 1012
Switzerland
+41 21 692 33 49 (Phone)

HOME PAGE: http://people.unil.ch/ericjondeau/

Swiss Finance Institute ( email )

40, Boulevard du Pont-d'Arve
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Switzerland
+41 21 692 33 49 (Phone)

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Gregory Levieuge

Banque de France ( email )

Paris
France

Jean-Guillaume Sahuc

Banque de France ( email )

31 rue Croix des Petits Champs
75049 Paris Cedex 01
France
+33 1 42 92-49-52 (Phone)
+33 1 42-92-62-92 (Fax)

HOME PAGE: http:// https://sites.google.com/site/sahuceconomics/

Université Paris Ouest - Nanterre, La Défense - EconomiX ( email )

200 Avenue de la République
Nanterre cedex, Nanterre Cedex 92000
France

Gauthier Vermandel

CMAP, Ecole polytechnique, Institut Polytechnique de Paris ( email )

Route de Saclay
Palaiseau, 91128
France

LEDa, Paris-Dauphine & PSL Universities ( email )

Place du Maréchal de Tassigny
Paris, Cedex 16 75775
France

Banque de France ( email )

Paris
France

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