IDEAS home Printed from https://ideas.repec.org/p/diw/diwwpp/dp341.html
   My bibliography  Save this paper

How to Turn an Industry Green: Taxes versus Subsidies

Author

Listed:
  • Susanne Dröge
  • Philipp J. H. Schröder

Abstract

Environmental policies frequently target the ratio of dirty to green output within the same industry. To achieve such targets the green sector may be subsidised or the dirty sector be taxed. This paper shows that in a monopolistic competition setting the two policy instruments have different welfare effects. For a strong green policy (a severe reduction of the dirty sector) a tax is the dominant instrument. For moderate policy targets, a subsidy will be superior (inferior) if the initial situation features a large (small) share of dirty output. These findings have implications for policies such as the Californian Zero Emission Bill or the EU Action Plan for Renewable Energy Sources.

Suggested Citation

  • Susanne Dröge & Philipp J. H. Schröder, 2003. "How to Turn an Industry Green: Taxes versus Subsidies," Discussion Papers of DIW Berlin 341, DIW Berlin, German Institute for Economic Research.
    • Handle: RePEc:diw:diwwpp:dp341
    as

    Download full text from publisher

    File URL: https://www.diw.de/documents/publikationen/73/diw_01.c.40347.de/dp341.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Delipalla, Sofia & Keen, Michael, 1992. "The comparison between ad valorem and specific taxation under imperfect competition," Journal of Public Economics, Elsevier, vol. 49(3), pages 351-367, December.
    2. Conrad, Klaus & Wang, Jianmin, 1993. "The effect of emission taxes and abatement subsidies on market structure," International Journal of Industrial Organization, Elsevier, vol. 11(4), pages 499-518.
    3. Alexander Haupt, 2000. "Environmental Product Standards, International Trade and Monopolistic Competition," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 7(4), pages 585-608, August.
    4. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
    5. Alistair M. Ulph, 1999. "Trade and the Environment," Books, Edward Elgar Publishing, number 1760.
    6. Buchanan, James M, 1969. "External Diseconomies, Corrective Taxes, and Market Structure," American Economic Review, American Economic Association, vol. 59(1), pages 174-177, March.
    7. Baumol,William J. & Oates,Wallace E., 1988. "The Theory of Environmental Policy," Cambridge Books, Cambridge University Press, number 9780521322249.
    8. Espey, Simone, 2001. "Renewables portfolio standard: a means for trade with electricity from renewable energy sources?," Energy Policy, Elsevier, vol. 29(7), pages 557-566, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Heimvik, Arild & Amundsen, Eirik S., 2021. "Prices vs. percentages: Use of tradable green certificates as an instrument of greenhouse gas mitigation," Energy Economics, Elsevier, vol. 99(C).
    2. Die Hu & Lu Qiu & Maoyan She & Yu Wang, 2021. "Sustaining the sustainable development: How do firms turn government green subsidies into financial performance through green innovation?," Business Strategy and the Environment, Wiley Blackwell, vol. 30(5), pages 2271-2292, July.
    3. Renström, Thomas I. & Spataro, Luca & Marsiliani, Laura, 2021. "Can subsidies rather than pollution taxes break the trade-off between economic output and environmental protection?," Energy Economics, Elsevier, vol. 95(C).
    4. Heimvik, Arild & Amundsen, Eirik S., 2019. "Prices vs. percentages: Use of tradable green certificates as an instrument of greenhouse gas mitigation," Working Papers in Economics 1/19, University of Bergen, Department of Economics.
    5. Wang, Hongwei & Zheng, Shilin & Zhang, Yanhua & Zhang, Kai, 2016. "Analysis of the policy effects of downstream Feed-In Tariff on China’s solar photovoltaic industry," Energy Policy, Elsevier, vol. 95(C), pages 479-488.
    6. Hua Cheng & Yinhong Yu & Shiyu Zhang, 2024. "Subsidies, green innovation, and the sustainable performance: evidence from heavy-polluting enterprises in China," Journal of Environmental Studies and Sciences, Springer;Association of Environmental Studies and Sciences, vol. 14(1), pages 102-116, March.
    7. Xin Zhang & Felix Nutakor & Michael Kaku Minlah & Jinke Li, 2023. "Can Digital Transformation Drive Green Transformation in Manufacturing Companies?—Based on Socio-Technical Systems Theory Perspective," Sustainability, MDPI, vol. 15(3), pages 1-24, February.
    8. Hübner, Julian, 2018. "Experimentelles Design zur Untersuchung der Auswirkungen von fiskalpolitischen Instrumenten auf nachhaltige Kaufentscheidungen im Leuchtmittelmarkt," The Constitutional Economics Network Working Papers 04-2018, University of Freiburg, Department of Economic Policy and Constitutional Economic Theory.
    9. Hengjie Xu & Qiang Mei & Fakhar Shahzad & Suxia Liu & Xingle Long & Jingjing Zhang, 2020. "Untangling the Impact of Green Finance on the Enterprise Green Performance: A Meta-Analytic Approach," Sustainability, MDPI, vol. 12(21), pages 1-16, October.
    10. Yu, Yugang & Han, Xiaoya & Hu, Guiping, 2016. "Optimal production for manufacturers considering consumer environmental awareness and green subsidies," International Journal of Production Economics, Elsevier, vol. 182(C), pages 397-408.
    11. Davidescu, Adriana AnaMaria & Popovici, Oana Cristina & Strat, Vasile Alecsandru, 2022. "Estimating the impact of green ESIF in Romania using input-output model," International Review of Financial Analysis, Elsevier, vol. 84(C).
    12. Xuemei Xie & Qiwei Zhu & Ruoyi Wang, 2019. "Turning green subsidies into sustainability: How green process innovation improves firms' green image," Business Strategy and the Environment, Wiley Blackwell, vol. 28(7), pages 1416-1433, November.
    13. Alexander Haupt, 2006. "Environmental Policy in Open Economies and Monopolistic Competition," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 33(2), pages 143-167, February.
    14. Shizuka Nishikawa, 2015. "Regulating Cournot Oligopoly with Environmental Externalities," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 43(4), pages 449-462, December.
    15. Susanne Dröge & Philipp J. H. Schröder, 2005. "Corrective Ad Valorem and Unit Taxes: A Welfare Comparison," Discussion Papers of DIW Berlin 534, DIW Berlin, German Institute for Economic Research.
    16. Arild Heimvik & Eirik S. Amundsen, 2019. "Prices vs. percentages: use of tradable green certificates as an instrument of greenhouse gas mitigation," CESifo Working Paper Series 7521, CESifo.
    17. Shenggang Ren & Duojun He & Tao Zhang & Xiaohong Chen, 2019. "Symbolic reactions or substantive pro‐environmental behaviour? An empirical study of corporate environmental performance under the government's environmental subsidy scheme," Business Strategy and the Environment, Wiley Blackwell, vol. 28(6), pages 1148-1165, September.
    18. Leo Wangler, 2012. "The political economy of the green technology sector: A study about institutions, diffusion and efficiency," European Journal of Law and Economics, Springer, vol. 33(1), pages 51-81, February.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Susanne Dröge & Philipp J. H. Schröder, 2005. "Corrective Ad Valorem and Unit Taxes: A Welfare Comparison," Discussion Papers of DIW Berlin 534, DIW Berlin, German Institute for Economic Research.
    2. Lambert Schoonbeek & Frans Vries, 2009. "Environmental taxes and industry monopolization," Journal of Regulatory Economics, Springer, vol. 36(1), pages 94-106, August.
    3. Requate, Till, 2005. "Environmental Policy under Imperfect Competition: A Survey," Economics Working Papers 2005-12, Christian-Albrechts-University of Kiel, Department of Economics.
    4. Vetter Henrik, 2005. "Pollution Taxes for Monopolistically Competitive Firms," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 5(1), pages 1-25, May.
    5. Susanne Dröge & Philipp Schröder, 2009. "The welfare comparison of corrective ad valorem and unit taxes under monopolistic competition," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 16(2), pages 164-175, April.
    6. Nicole Gürtzgen & Michael Rauscher, 2000. "Environmental Policy, Intra-Industry Trade and Transfrontier Pollution," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 17(1), pages 59-71, September.
    7. Rauscher, Michael, 2001. "International trade, foreign investment, and the environment," Thuenen-Series of Applied Economic Theory 29, University of Rostock, Institute of Economics.
    8. Lahiri, Sajal & Ono, Yoshiyasu, 2015. "Pollution, foreign direct investment, and welfare," Research in Economics, Elsevier, vol. 69(2), pages 238-247.
    9. Carbonnier Cl´ement, 2014. "The incidence of non-linear consumption taxes," Научный результат. Серия «Экономические исследования», CyberLeninka;Федеральное государственное автономное образовательное учреждение высшего образования «Белгородский государственный национальный исследовательский университет», issue 1, pages 5-18.
    10. Meredith Fowlie & Mar Reguant & Stephen P. Ryan, 2016. "Market-Based Emissions Regulation and Industry Dynamics," Journal of Political Economy, University of Chicago Press, vol. 124(1), pages 249-302.
    11. Lockwood, Ben, 2003. "Imperfect competition, the marginal cost of public funds and public goods supply," Journal of Public Economics, Elsevier, vol. 87(7-8), pages 1719-1746, August.
    12. Joanna Poyago-Thotoky, 2003. "Optimal Environmental Taxation, R&D Subsidization and the Role of Market Conduct," Finnish Economic Papers, Finnish Economic Association, vol. 16(1), pages 15-26, Spring.
    13. Dieter Schmidtchen & Jenny Helstroffer & Christian Koboldt, 2021. "Regulatory failure and the polluter pays principle: why regulatory impact assessment dominates the polluter pays principle," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 23(1), pages 109-144, January.
    14. Wittmann, Nadine, 2014. "Regulating gasoline retail markets: The case of Germany," Economics Discussion Papers 2014-17, Kiel Institute for the World Economy (IfW Kiel).
    15. Clemens Heuson, 2008. "Weitzman revisited: Emission standards vs. taxes with uncertain control costs and market power of polluting firms," Discussion Paper Series 299, Universitaet Augsburg, Institute for Economics.
    16. Fullerton, Don & Metcalf, Gilbert E., 2002. "Tax incidence," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 26, pages 1787-1872, Elsevier.
    17. Ngo Van Long & Antoine Soubeyran, 2001. "Emission Taxes and Standards for an Asymmetric Oligopoly," CIRANO Working Papers 2001s-07, CIRANO.
    18. Joanna Poyago-Thotoky, 2003. "Optimal Environmental Taxation, R&D Subsidization and the Role of Market Conduct," Finnish Economic Papers, Finnish Economic Association, vol. 16(1), pages 15-26, Spring.
    19. Hirose, Kosuke & Ishihara, Akifumi & Matsumura, Toshihiro, 2021. "Tax versus Regulations: Robustness to Polluter Lobbying Against Near-Zero Emission Targets," MPRA Paper 108380, University Library of Munich, Germany.
    20. Sharat Ganapati & Joseph S. Shapiro & Reed Walker, 2016. "The Incidence of Carbon Taxes in U.S. Manufacturing: Lessons from Energy Cost Pass-through," Cowles Foundation Discussion Papers 2038R3, Cowles Foundation for Research in Economics, Yale University, revised Mar 2018.

    More about this item

    Keywords

    Environmental policy; Monopolistic competition; Taxes; Subsidies; Welfare; Zero Emission Bill;
    All these keywords.

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:diw:diwwpp:dp341. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Bibliothek (email available below). General contact details of provider: https://edirc.repec.org/data/diwbede.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.