Subsidies, costs, and local taxes: a theoretical note on circular economy investments

Iacopo Grassi ()
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Iacopo Grassi: University of Naples Federico II

Economics Bulletin, 2026, vol. 46, issue 1, 209 - 218

Abstract: This paper develops a theoretical model to examine how investment subsidies for circular economy projects influence local taxation in decentralized governance systems. When environmental infrastructure is co-financed by higher-level governments but operated locally, fiscal effects depend on how investments modify cost structures. Using a principal–agent framework, I show that the relationship between subsidies and local taxes is non-monotonic: at low investment levels, subsidies reduce costs and taxes, but beyond the efficiency threshold, further investment raises operational complexity and fiscal pressure. A dynamic extension incorporating transition costs explains why local taxes may temporarily increase before efficiency gains materialize. The model offers a tractable framework to interpret the fiscal implications of circular economy policies within multi-level European governance, with specific relevance to current EU funding schemes.

Keywords: Circular economy; Investment subsidies; Local taxation; Fiscal trade-offs; Environmental governance (search for similar items in EconPapers)
JEL-codes: H2 Q5 (search for similar items in EconPapers)
Date: 2026-03-30
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