Essay About Policyobtain Subsidy And Tax Allowances

Research – Subsides and Transferable Permits
SUBSIDIES AND TRANSFERABLE PERMITS1. SubsidiesSubsidies – incentive-based policyObtain subsidy per unit of emissions reductionOr lump sum grants, loans or tax allowances[pic 1]If subsidy per unit emissions reduction is set at the same level as tax –instruments are symmetric [pic 2]If symmetry result true – subsidies attractive option for government – in fact untrueWill the polluter reduce emissions further than e*?No as each extra unit of emissions reduction costs > subsidyOnly from e0 and e* – firm incentive reduce emissions. So per unit subsidy results same level of pollution control for an individual firm as an emissions taxSo if subsidy rate is set – MAC = MD. Taxes and subsidies appear symmetric instrumentsEconomic efficiency and cost-effectivenessDifference taxes and subsidies – impact on polluters’ profits. Subsidy increases polluter’s profit – area d Tax reduce profits – a + b + c. This can influence firm’s choice leave/stay in industry. A marginal firm – average cost just equal MR (price) if obtain subsidy – stay in business and continue polluting if faced with tax – forced out Although subsidy encourages individual polluters to reduce emissions – keeps size of industry above socially desirable level Tax – encourages individual polluters to abate emissions and decrease the size of the industry.Under certain assumptions – subsidy may not only deter exit from the polluting industry but, even worse, may attract new firms into the industry (Baumol and Oates). So total emissions in industry increasedIndeed – more effective subsidy for an individual firm to reduce emissions, the greater the increase in total industry emissionsBut can show subsidy may not distort size of an industry Apply subsidy to ‘close class’ of firmsOvercome initial limitations, but..Dynamic EfficiencyPolluter knowledge how regulatory might act. Subsidy introduced, paid on reduction from a benchmark level of emissions (polluter’s past emission records). So prior no incentive to lower emissions, maybe even to raise, new abatement technology unlikely to be introduced. If invest – possibility receiving lower subsidy rate in future if the regulator adjusts the subsidy rate to the new level where MAC = MDContrasts with tax – investment in new technology can decrease tax costsFairness and EquityPolluters find subsidies fair, as they are being paid!Also polluters are not being forced to act in a certain way Subsidy schemes – voluntary by their very nature and therefore are not perceived as additional constraints by firms but contradict PPP, as it implies have a right to pollute the environment.Society must pay to take right away. Taxpayers may also find subsidies unfair, as the same result may be achieved without spending taxpayers’ money.EnforceabilityEmissions need to be measured and monitoredOtherwise possible polluters could claim extra subsidy. Also, if polluters are caught claiming extra subsidies, there will be sanctioning costs involved.Subsidies are often paid as part of contractual agreements (eg for installing a certain bit of abatement technology or for implementing certain environmentally friendly farming practices). For subsidies paid under such agreements, these schemes still have to be monitored, or else there is an incentive for participating individuals not to fulfil their contracts. The difficulty (and cost) of monitoring the scheme depends on the type of scheme: Is the glass half full or half empty?Historically Agri-Environmental Policy extols the positive outcomes of land management over the negativePGP