Tax on emissions or subsidy to renewables? Evaluating the effects on the economy and on the environment

ABSTRACT

We examine the relationship between the economy and the environment in a model where production uses nonpolluting renewable and polluting nonrenewable resources. There is policy intervention through a tax on emissions and a subsidy to renewables extraction/production. Results show that both instruments are able to decrease emissions intensity of output. However, when used together, the desired effect is higher. Empirically it is shown that the subsidy achieves higher renewables intensity and although present emissions per output are similar for both instruments, the subsidy achieves lower future levels.

KEYWORDS:

• (Non)-renewable resources
• government intervention
• pollution
• economy

JEL CLASSIFICATION:

• O13
• Q20
• Q32
• Q42
• Q58

Notes

¹ Apart from the debate on the consideration of population growth and the introduction of other production factors such as capital and labour, we abstract from these points, in order to isolate the effects of natural resources on the economy and the environment.

² To simplify notations, we suppress the time argument t and will do so in most of the following deductions.

³ This may refer to dam or wind park construction.

Additional information

Funding

This work was supported by the Fundação para a Ciência e Tecnologia under [Grant number SFRH/BPD/86707/2012] conceded to Susana Silva.