Emissions leakage and subsidies for pollution abatement. Pay the polluter or the supplier of the remedy?

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Discussion Papers

Statistics Norway Research department No. 708

•

October 2012

Carolyn Fischer, Mads Greaker and Knut Einar Rosendahl

Emissions leakage and subsidies for pollution abatement

Pay the polluter or the supplier of the remedy?

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Discussion Papers No. 708, October 2012 Statistics Norway, Research Department

Carolyn Fischer, Mads Greaker and Knut Einar Rosendahl

Emissions leakage and subsidies for pollution abatement

Pay the polluter or the supplier of the remedy?

Abstract:

Asymmetric regulation of a global pollutant between countries can alter the competitiveness of industries and lead to emissions leakage. For most types of pollution, abatement technologies are available for firms to produce with lower emissions. However, the suppliers of those 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.

Keywords: Emissions leakage; Abatement subsidies; Upstream technology market JEL classification: Q54; H23; L13

Acknowledgements: We are grateful to Cathrine Hagem for comments on an earlier draft, and for financial support from the Research Council of Norway (through the Renergi programme and CREE), and from Entwined-Mistra.

Address: Mads Greaker, Statistics Norway, Research Department. E-mail: mgr@ssb.no Knut Einar Rosendahl, Statistics Norway, Research Department. E-mail: ker@ssb.no Carolyn Fischer, Resources for the Future. E-mail: fischer@rff.org

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Discussion Papers comprise research papers intended for international journals or books. A preprint of a Discussion Paper may be longer and more elaborate than a standard journal article, as it may include intermediate calculations and background material etc.

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ISSN 0809-733X Print: Statistics Norway

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Sammendrag

Asymmetrisk regulering av utslipp mellom land kan påvirke industriens konkurransekraft og føre til utslippslekkasje. For de fleste typer utslipp fins det teknologier som bedrifter kan kjøpe for å produsere med lavere utslipp. Tilbudet av slike teknologier er imidlertid ofte preget av imperfekt konkurranse. I en slik situasjon med to typer markedssvikt undersøker vi effektene av å subsidiere teknologier som reduserer utslipp. Vi finner at det er mer hensiktsmessig å subsidiere tilbydere framfor kjøpere av teknologi. Subsidiering av teknologikjøp fører til høyere teknologipriser, og dermed mindre bruk av slik teknologi i andre land. Dette kan gi økt lekkasje av utslipp. Subsidiering av teknologisalg kan derimot redusere teknologiprisen og dermed også utslippslekkasjen.

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(22)

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(23)

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(24)

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(25)

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(26)

180 200 220 240 260 280 300 320 340

0.000 0.075 0.150 0.225 0.300 0.375 0.450 0.525 0.600 0.675 0.750 0.825 Subsidy rate

Emissions

Downstream Emissions Reg. 2 Downstream Total emissions Upstream Emissions Reg. 2 Upstream Total emissions

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(27)

0.94 0.95 0.96 0.97 0.98 0.99 1.00 1.01 1.02

0.000 0.075 0.150 0.225 0.300 0.375 0.450 0.525 0.600 0.675 0.750 0.825 Subsidy rate

Welfare (index)

0 % 1 % 2 % 3 % 4 % 5 % 6 % 7 % 8 %

Subsidy payments (% of welfare)

Downstream Welfare Region 1 Downstream Welfare Reg 1+2 Upstream Welfare Region 1 Upstream Welfare Reg 1+2

Downstream Subsidy Payment (Right axis) Upstream Subsidy Payment (Right axis)

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(28)

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(29)

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(30)

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