Tax-subsidy Scheme Research Articles

Business cycles, sectoral price stabilization, and climate change mitigation: A model of multi-sector growth in the tradition of the Bielefeld disequilibrium approach

Sectoral price stabilization is critical in the pressing context of de-globalization and the climate crisis. Strategic price controls may be effective in reducing economic volatility, but fail to curb emissions, unlike quantity controls such as rationing consumption. In contrast, carbon pricing may accelerate decarbonization, but generate inflationary pressures. In order to evaluate the effectiveness of sector-oriented policies in stabilizing sectoral prices and accelerating the low-carbon transition at the same time, this paper employs a novel environmentally-extended, data-driven dynamic model of multi-sector growth based on the Bielefeld disequilibrium approach to the microeconomic stability of competitive economies. The general composite model allows to empirically characterize the network structure and intensity of dynamic price-quantity interactions at the sector level, which capture heterogeneous firm behavior by integrating long-run Walrasian price and classical quantity dynamics coupled with short-run Keynesian features in the form of target rate of return pricing and demand-led investment. A Bayesian hierarchical model on US BEA data empirically estimates the linear adjustment coefficients and stable combinations are computed. The US economy is shown to feature a highly hierarchical network structure of intermediate production that is particularly vulnerable to micro-economic shocks driven by wars and climate change. Tax-subsidy schemes are shown to be the most effective in stabilizing sectoral prices and economy-environment interactions.

Optimal carbon taxation and horizontal equity: A welfare-theoretic approach with application to German household data

We develop a model of optimal taxation and redistribution under an ambitious climate target. We take into account vertical income differences, but also explicitly capture horizontal equity concerns by considering heterogeneous energy efficiencies. By deriving first- and second-best rules for policy instruments including carbon and labor taxes, transfers and energy subsidies, we investigate analytically how vertical and horizontal inequality is considered in the welfare maximizing tax structure. We calibrate the model to German household data and a 30 percent emission reduction goal and show that redistribution of carbon tax revenues via household-specific transfers is the first-best policy. Under plausible assumptions on inequality aversion, transfers to energy-intensive households should be about five times higher than transfers to energy-efficient households. Equal per-capita transfers do not require to observe households’ efficiency type, but increase equity-weighted mitigation costs by around 5 percent compared to the first-best. Mitigation costs increase by less, if the government can implement a uniform clean energy subsidy or household-specific tax-subsidy schemes on energy consumption and labor income that target heterogeneous energy efficiencies. Horizontal equity concerns may therefore constitute a new second-best rationale for clean energy policies or differentiated energy taxes.

Policies for Material Circularity: the Case of Lithium

Improper waste management carries social risks and dissipates high-value materials. Moreover, material market prices do not reflect these hidden costs and values. Two important questions are how prices can inform society about their resource use impact and how market-based policies optimize material circularity. This study adds to the literature by analyzing the effect of market-based policies aimed at promoting circular material reuse in a market defied by harmful waste but enhanced by recycling. The findings indicate that a landfill tax is a first-best policy since it targets the external costs of waste disposal, improves welfare, reduces damages, and boosts recycling. If a landfill tax is not feasible, other programs like taxes, subsidies, and a tax-subsidy scheme provide second-best results. Remarkably, recycling subsidies can stimulate higher raw material extraction and generate rebound effects. We also explore other non-market-based strategies to prevent waste and make recycling more cost-competitive and easier to recycle. The numerical results and sensitivity analysis of the lithium market illustrate the model's flexibility and prove why some policies are superior to others for reducing waste and creating value from used materials. Our study results serve as a guide to designing policies for optimal material circularity.

Optimal energy taxes and subsidies under a cost-effective unilateral climate policy: Addressing carbon leakage

We analyse how a country pursuing a unilateral climate policy may contribute to a reduction in global CO2 emissions in a cost-effective way. To do so its system of energy taxes and subsidies must account for leakage of emissions from the domestic to the foreign economy. We focus on leakage occurring via international trade in electricity and via shifts between domestic and foreign production of other goods. The optimal tax-subsidy scheme is based on an intuitive principle: Impose a uniform carbon tax on all additions to global emissions caused by changes in domestic production and consumption of energy, including additions to emissions occurring via shifts in international trade. Emissions from the sector exposed to foreign competition should be taxed at reduced rates to avoid excessive carbon leakage, and a part of the carbon tax on electricity should be levied at the consumer rather than the producer level to ensure taxation of the carbon content of imported electricity. Producers of renewables-based electricity should receive a subsidy to internalize their contribution to the reduction of global emissions. In other sectors emissions should be taxed at a uniform rate corresponding to the marginal social cost of meeting the target for emissions reduction. Simulations calibrated to data for the Danish economy suggest that redesigning energy taxes and subsidies to account for carbon leakage can generate a welfare gain.

A Break-even Tax-subsidy Scheme to Realize First-best Welfare

A Break-even Tax-subsidy Scheme to Realize First-best Welfare

Recycling under environmental, climate and resource constraints

This paper investigates the recycling opportunities of an industrial sector constrained by resource, climate, and waste capacities. To do this, we model the full lifecycle of a good to consider the waste and greenhouse gas (GHG) emissions coming from both its production — from virgin or recycled materials — and consumption. We identify the optimal trajectories of resources use, mainly depending on the relative scarcity of the resources and on their emissions. Although recycling is usually, and correctly, noted as an opportunity to reduce the impact of consumption on primary resources and waste, we also consider the possible negative environmental consequences of recycling and we discuss the resulting arbitrations. We characterize the optimal recycling strategy and we show that, in some cases, the recycling rate through time is an inverted U-shape, and there can be a catch-up phase of consumption at the end of the social planner program. Finally, we discuss the policy implications of our model by identifying and analyzing the set of optimal tax-subsidy schemes, and we highlight the existence of standard environmental externalities as well as a positive externality linked to the absence of a market for waste.

Scaling up Climate Mitigation Policy in Germany

Germany has set national greenhouse emissions targets of a 65 percent reduction below 1990 levels by 2030 and net zero emissions by 2045, along with various sectoral emissions goals. To achieve these targets, the government has introduced multi-pronged policy measures, including a national emissions trading system (ETS), which complements the ETS at the EU level. This paper shows the substantial variation in the price responsiveness of emissions across sectors and thus prices implied by sectoral targets. It proposes the following measures to help Germany meet emissions targets with greater certainty and cost effectiveness: (i) further strengthening carbon pricing, for example through automatically rising price floors for the national ETS after 2026; (ii) harmonizing carbon pricing to reduce cross-sector differences in marginal abatement costs; and (iii) introducing feebates (revenue neutral taxsubsidy schemes) to reinforce incentives at the sectoral level. The paper also studies the distributional impact of higher carbon pricing and suggests that reducing social security contributions can mitigate the regressive direct impact of higher carbon pricing on lowerincome households. Concerns with carbon leakages and firms’ competitiveness are best addressed through agreeing on an international carbon price floor.

Implementing the United States’ Domestic and International Climate Mitigation Goals

The United States has pledged to become carbon neutral by 2050, meet sectoral objectives (e.g., for carbon free power, electric vehicles) and encourage greater mitigation among large emitting countries and of international transportation emissions. Fiscal policies at the national, sectoral, and international level could play a critical role in implementing these objectives, along with investment, regulatory, and technology policies. Fiscal instruments are cost-effective, can enhance political acceptability, and do not worsen, or could help alleviate, budgetary pressures. Domestically, a fiscal policy package could contain a mix of economy-wide carbon pricing and revenue-neutral feebates (i.e., tax-subsidy schemes) with the latter reinforcing mitigation in the transport, power, industrial, building, forestry, and agricultural sectors. Internationally, a carbon price floor among large emitters (with flexibility to implement equivalent measures) could effectively scale up global mitigation, while levies/feebates offer a practical approach for reducing maritime and aviation emissions.

Aviation tax and railway subsidy: An integrated policy

In this paper, we build a simple model to investigate the impacts of using aviation tax to subsidize high-speed rail (HSR). We find that when the HSR subsidy is not directly linked to the aviation tax, introducing this subsidy will decrease the air traffic and increase the rail traffic on the route where air transport and HSR compete. However, if part of the aviation tax revenue is earmarked for the HSR subsidy (i.e., the integrated tax-subsidy policy), the traffic implications of the HSR subsidy will be the opposite. To extend the analysis to a transportation network, when the integrated tax-subsidy policy only involves aviation tax revenue from routes with HSR presence, it will decrease air traffic on routes without HSR. When the integrated tax-subsidy scheme involves tax revenue from the whole network, the traffic implications depend on the comparison between aviation tax rate on routes with and without HSR.

Implementing the United States' Domestic and International Climate Mitigation Goals: A Supportive Fiscal Policy Approach

The United States has pledged to become carbon neutral by 2050, meet sectoral objectives (e.g., for carbon free power, electric vehicles) and encourage greater mitigation among large emitting countries and of international transportation emissions. Fiscal policies at the national, sectoral, and international level could play a critical role in implementing these objectives, along with investment, regulatory, and technology policies. Fiscal instruments are cost-effective, can enhance political acceptability, and do not worsen, or could help alleviate, budgetary pressures. Domestically, a fiscal policy package could contain a mix of economy-wide carbon pricing and revenue-neutral feebates (i.e., tax-subsidy schemes) with the latter reinforcing mitigation in the transport, power, industrial, building, forestry, and agricultural sectors. Internationally, a carbon price floor among large emitters (with flexibility to implement equivalent measures) could effectively scale up global mitigation, while levies/feebates offer a practical approach for reducing maritime and aviation emissions.

Opimal Unilateral Climate Policy with Carbon Leakage at the Extensive and the Intensive Margin

We analyse the optimal design of unilateral climate policy in an open economy where the government is committed to a target for reduction of domestic CO2 emissions but where it is also concerned about carbon leakage. We highlight the importance of distinguishing between leakage at the extensive margin where firms relocate to a foreign country to avoid the domestic carbon tax, and leakage at the intensive margin where domestic firms lose world market shares to foreign competitors due to the tax. Assuming that the government cannot implement border carbon adjustments, we show that the optimal allocation can still be implemented through a combination of taxes on emissions, taxes on domestic consumption of energy and final goods, an output subsidy as well as a lump-sum location subsidy to leakage-exposed firms, subsidies to carbon capture, taxes on domestic production of fossil fuels, and a subsidy to domestic production of green energy. Simulation experiments indicate that the social welfare gain from implementing the optimal leakage-adjusted tax-subsidy scheme rather than a single uniform emissions tax could amount to 0.5 percent of national income. A location subsidy aimed at reducing leakage at the extensive margin contributes to reducing the welfare loss from leakage.

Climate Actions and Stranded Assets: The Role of Financial Regulation and Monetary Policy

Limiting global warming to well below 20 C may result in the stranding of carbon-sensitive assets. This could pose substantial threats to financial and macroeconomic stability. We use a dynamic stochastic general equilibrium model with financial frictions and climate policy to study the risks a low-carbon transition poses to financial stability and the different instruments central banks could use to manage these risks. We show that, even for very ambitious climate targets, transition risks are limited for a credible, exponentially growing carbon price, although temporary “green paradoxes” phenomena may materialize. Financial regulation encouraging the decarbonization of the banks’ balance sheets via tax-subsidy schemes significantly reduces output losses and inflationary pressures but it may enhance financial fragility, making this approach a risky tool. A green credit policy as a response to a financial crisis originated in the fossil sector can potentially provide an effective stimulus without compromising the objective of price stability. Our results suggest that the involvement of central banks in climate actions must be carefully designed in compliance with their mandate to avoid unintended consequences.

Climate Actions and Stranded Assets: The Role of Financial Regulation and Monetary Policy

Limiting global warming to well below 20C may result in the stranding of carbon-sensitive assets. This could pose substantial threats to financial and macroeconomic stability. We use a dynamic stochastic general equilibrium model with financial frictions and climate policy to study the risks a low-carbon transition poses to financial stability and the different instruments central banks could use to manage these risks. We show that, even for very ambitious climate targets, transition risks are limited for a credible, exponentially growing carbon price, although temporary “green paradoxes” phenomena may materialize. Financial regulation encouraging the decarbonization of the banks’ balance sheets via tax-subsidy schemes significantly reduces output losses and inflationary pressures but it may enhance financial fragility, making this approach a risky tool. A green credit policy as a response to a financial crisis originated in the fossil sector can potentially provide an effective stimulus without compromising the objective of price stability. Our results suggest that the involvement of central banks in climate actions must be carefully designed in compliance with their mandate to avoid unintended consequences.

Optimal Energy Taxes and Subsidies under a Cost-Effective Unilateral Climate Policy: Addressing Carbon Leakage

We analyze how a country pursuing a unilateral climate policy may contribute to a reduction in global CO2 emissions in a cost-effective way. To do so its system of energy taxes and subsidies must account for leakage of emissions from the domestic to the foreign economy. We focus on leakage occurring via international trade in electricity and via shifts between domestic and foreign production of other goods. The optimal tax-subsidy scheme is based on an intuitive principle: Impose a uniform carbon tax on all additions to global emissions caused by changes in domestic production and consumption of energy, including additions to emissions occurring via shifts in international trade. Emissions from the sector exposed to foreign competition should be taxed at reduced rates to avoid excessive carbon leakage, and a part of the carbon tax on electricity should be levied at the consumer rather than the producer level to ensure taxation of the carbon content of imported electricity. Producers of renewables-based electricity should receive a subsidy to internalize their contribution to the reduction of global emissions. In other sectors emissions should be taxed at a uniform rate corresponding to the marginal social cost of meeting the target for emissions reduction. Simulations calibrated to data for the Danish economy suggest that redesigning energy taxes and subsidies to account for carbon leakage can generate a welfare gain.

A Macroeconomic Model with Price Flexibility

A simple macroeconomic model is used to show that the market failure to maintain macroeconomic stability can be due to (a) price rigidity or (b) price flexibility that allows false and abnormal prices to prevail. The macroeconomic literature typically considers the first case only; this article focuses on the second case. Besides the Keynesian fiscal policy, this article considers a Pigouvian tax–subsidy scheme; the latter can be used to correct each false price individually (this use in macroeconomics resembles the more familiar use in public economics). This helps alleviate the scarcity of instruments with policymakers. As in the writings of Keynes, price stability (or rigidity) here is a policy target rather than an assumption in the model. There has been a general need to reconsider macroeconomic models since the Great Recession of 2008; this article contributes in this endeavour. JEL: E12, E62, H20

Quota Markets and Technological Change

Quota or permit markets have become an important tool for climate and energy policy, as they not only promise allocative efficiency but also provide a market-based selection of the best new technological options. We analyze their effect on technological change in a case where several technologies could be developed and where R&D firms are granted patents with a finite lifetime. We show that R&D incentives are not only too low, as is well known, but incentives are also distorted across technologies, which is a new result. Compared to the social optimum, the best technology is developed in too few cases, whereas a less promising technology might be developed too often. This distortion is difficult to correct, as information about new technologies is usually missing. However, we show that combining a quota market with a simple tax-subsidy scheme can correct some of these distortions, even if the regulator has no information regarding the properties of new technologies.

International Migration and Welfare Implications

This article surveys the current trend in international migration of labour, particularly from developing countries, with special emphasis on the welfare aspect of emigration on the remaining residents, and it also investigates the tension between brain drain and brain gain. It is evident from the existing literature that welfare of the remaining residents of a labour-sending developing economy can be influenced positively or negatively by exit of its skilled labour force. A detailed survey of the literature finds that positive probability of migration to a rich country raises the average skill level in the poor origin country. Migration in these studies work as a substitute for domestic tax-subsidy schemes aimed at raising the independently chosen low level of human capital to a socially desirable state. Related studies show that there can be both positive and negative impact of remittances on the welfare of the source country. JEL Classification: F22, F24, J24

ENDOGENOUS RECOMBINANT GROWTH AND INTELLECTUAL PROPERTY RIGHTS

We show that, even in a framework in which monopolistic exploitation of patents does not occur, patents still give rise to serious drawbacks. We rely on a recombinant growth framework that provides a stylized but clear description of the formation of knowledge externalities. In our setting a benevolent government buys immediately new patents in a competitive market and releases their contents for free. We show that inefficiencies nevertheless arise and welfare can be improved by correcting the market price through a tax–subsidy scheme. We characterize the (asymptotic) steady-state equilibrium, and some properties of the transitional path. We show that if certain conditions are met, then the economy will converge to its (asymptotic) balanced growth path, and along such a pathgrowth will be independent of the policy parameter; conversely, transition dynamics are affected by the choice of the policy parameter. We then quantitatively analyze the effect of different policy interventions on welfare, and show that stricter tax (weaker appropriability) regimes lead to higher social welfare.

Welfare implications of the renewable fuel standard with an integrated tax-subsidy policy

This paper derives the optimal integrated tax-subsidy policy where one input is taxed and revenues are used to subsidize the use of a substitute input to reduce greenhouse gas emissions given the existing policies under the Renewable Fuel Standard policies. We measure the welfare effects and impact on cellulosic ethanol production after implementing the tax-subsidy policy using a general equilibrium model. A revenue-neutral integrated tax-subsidy scheme leads to a small positive tax rate for crude oil and a large positive subsidy for cellulosic ethanol because the former has a larger emissions coefficient than the latter. The overall welfare effects of an integrated tax subsidy scheme are less than a 1% increase for the economy but the growth in the cellulosic ethanol industry could range from 28% to 238% because the revenues from taxing crude oil are directly used to subsidize cellulosic ethanol production.

Pareto-improving income redistribution: expanding consumer access to the vaccines market

Economic theory has proved that income redistribution in imperfectly competitive markets can increase social welfare and lead to Pareto-improving situations. This paper shows that, under certain assumptions, self-financing tax subsidy schemes can have Pareto-improving effects also in a competitive framework. This result is achieved by exploiting external economies of scale, resulting in a decrease in price along with an increase in output. The case of the vaccines industry and World Health Organization initiatives are examined to illustrate the theoretical analysis.