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The More the Merrier? The Role of Green Research and Development Subsidies under Different Environmental Policies

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  • Leonie P. Meissner

Abstract

I study the role of green research and development (R&D) subsidies under different environmental policies. Using a stylized equilibrium model calibrated to the European electricity sector, I analyze the effects of R&D subsidies under (1) an emission tax, (2) an emission cap, and (3) no environmental policy, focusing on competitiveness, environmental outcomes, and welfare. I find that increasing R&D subsidies increases knowledge accumulation and clean-sector output, displacing dirty-sector production. This raises overall output, lowers production costs, and enhances sectoral competitiveness. However, environmental benefits from R&D subsidies occur only under an emission tax or in the absence of environmental policy. Under an emission cap, emission prices fall from an increase in the R&D subsidy, reducing compliance costs without lowering total emissions. Our calibration further reveals interaction effects between environmental policy stringency and the effectiveness of the R&D subsidy under an emission tax, emission cap, or in the absence of an environmental policy.

Suggested Citation

  • Leonie P. Meissner, 2025. "The More the Merrier? The Role of Green Research and Development Subsidies under Different Environmental Policies," CESifo Working Paper Series 12002, CESifo.
    • Handle: RePEc:ces:ceswps:_12002
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    Keywords

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    JEL classification:

    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • O38 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Government Policy
    • Q55 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Technological Innovation
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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