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Robust Policies against Emission Leakage: The Case for Upstream Subsidies

Author

Listed:
  • Carolyn Fischer
  • Mads Greaker
  • Knut Einar Rosendahl

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 tech-nologies 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.

Suggested Citation

  • Carolyn Fischer & Mads Greaker & Knut Einar Rosendahl, 2014. "Robust Policies against Emission Leakage: The Case for Upstream Subsidies," CESifo Working Paper Series 4742, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_4742
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    File URL: https://www.cesifo-group.de/DocDL/cesifo1_wp4742.pdf
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    References listed on IDEAS

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    1. Laffont, Jean-Jacques & Tirole, Jean, 1996. "Pollution permits and compliance strategies," Journal of Public Economics, Elsevier, vol. 62(1-2), pages 85-125, October.
    2. Maia David & Bernard Sinclair-Desgagné, 2010. "Pollution Abatement Subsidies and the Eco-Industry," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 45(2), pages 271-282, February.
    3. Lerner, Abba P, 1972. "Pollution Abatement Subsidies," American Economic Review, American Economic Association, vol. 62(5), pages 1009-1010, December.
    4. Damien Demailly & Philippe Quirion, 2006. "CO2 abatement, competitiveness and leakage in the European cement industry under the EU ETS: Grandfathering vs. output-based allocation," Post-Print halshs-00639327, HAL.
    5. Katrin Millock & Céline Nauges, 2006. "Ex Post Evaluation of an Earmarked Tax on Air Pollution," Land Economics, University of Wisconsin Press, vol. 82(1), pages 68-84.
    6. Ottar MÆstad, 1998. "On the Efficiency of Green Trade Policy," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 11(1), pages 1-18, January.
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    Citations

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    Cited by:

    1. Bougette, Patrice & Charlier, Christophe, 2015. "Renewable energy, subsidies, and the WTO: Where has the ‘green’ gone?," Energy Economics, Elsevier, vol. 51(C), pages 407-416.
    2. Carolyn Fischer, 2016. "Strategic Subsidies for Green Goods," Working Papers 2016.30, Fondazione Eni Enrico Mattei.
    3. Steve Charnovitz & Carolyn Fischer, 2014. "Canada – Renewable Energy: Implications for WTO Law on Green and Not-so-Green Subsidies," Working Papers 2014.94, Fondazione Eni Enrico Mattei.
    4. Fischer, Carolyn & Greaker, Mads & Rosendahl, Knut Einar, 2018. "Strategic technology policy as a supplement to renewable energy standards," Resource and Energy Economics, Elsevier, vol. 51(C), pages 84-98.
    5. Jacobsen, Grant D., 2015. "Do energy prices influence investment in energy efficiency? Evidence from energy star appliances," Journal of Environmental Economics and Management, Elsevier, vol. 74(C), pages 94-106.

    More about this item

    Keywords

    strategic environmental policy; carbon leakage; abatement technology;

    JEL classification:

    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q55 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Technological Innovation

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