The choice of the government green subsidy scheme: innovation subsidy vs. product subsidy

Abstract

A critical problem that beleaguers governments in the promotion of green development is determining which approach to employ in establishing an efficient green subsidy scheme. In this study, we scrutinise the effects of three government subsidy schemes: a green non-subsidy (GNS), a green product subsidy (GPS), and a green innovation subsidy (GIS). Taking social welfare into consideration, the optimal green subsidy scheme of governments in different settings is investigated. Interestingly, we find that a green subsidy is not always a good choice for the government. When the cost of green innovation is particularly low, or when both the cost of green innovation and the variable production cost of green product are high, if the environmental improvement effectiveness yielded by green innovation is insignificant, the GNS is the best. Otherwise, both the GPS and the GIS achieve greater levels of social welfare. In addition, counter to intuition, the GPS outperforms the GIS when the cost of green innovation is sufficiently high and green innovation reduces the variable production cost of green product significantly, even if the GIS can directly help to lighten the green innovation cost load. However, from the perspective of maximising subsidy efficiency, the GIS is always better than the GPS.