Subsidies to industry and the environment

by David Kelly

"Governments support particular firms or sectors by granting low interest financing, reduced regulation, tax relief, price supports, monopoly rights, and a variety of other subsidies. Previous work in partial equilibrium shows that subsidies to environmentally sensitive industries increases output and pollution emissions. We examine the environmental effects of subsidies in general equilibrium. Since all resources are used, whether or not subsidies increase emissions depends on the relative emissions intensity and incentives to emit of the subsidized industry versus the emissions...