Another potential emissions pricing instrument is a subsidy for pollution abatement, where
firms are rewarded for every unit of emissions that they reduce below some baseline level. At
the margin, this instrument provides the same incentives as emission taxes or cap-and-trade,
since every additional unit of emissions implies a cost to the firm in forgone subsidy receipts.
Thus, these subsidies can bring about the same choices for input intensities and end-of-pipe
treatment as other emissions pricing policies. However, in practice such subsidies are less
cost-effective than emissions taxes or tradable allowances. Since they lower firms’ average
costs, they provide the wrong incentives regarding the level of output, which leads to excess
Another potential emissions pricing instrument is a subsidy for pollution abatement, wherefirms are rewarded for every unit of emissions that they reduce below some baseline level. Atthe margin, this instrument provides the same incentives as emission taxes or cap-and-trade,since every additional unit of emissions implies a cost to the firm in forgone subsidy receipts.Thus, these subsidies can bring about the same choices for input intensities and end-of-pipetreatment as other emissions pricing policies. However, in practice such subsidies are lesscost-effective than emissions taxes or tradable allowances. Since they lower firms’ averagecosts, they provide the wrong incentives regarding the level of output, which leads to excess
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