Carbon Pricing and Green Subsidies: What Is the Optimal Combination of the Two?

Riyad Abbas, Mathieu Fouquet and Alexandre Godzinski

Economie et Statistique / Economics and Statistics, 2024, issue 545, 47-63

Abstract: [eng] Policies encouraging carbon mitigation by means of carbon pricing come up against a number of difficulties, such as loss of competitiveness, carbon leakage and lack of social acceptability. To address these challenges, more and more governments are opting for incentives in the form of green subsidies. Using the Vulcain computable general equilibrium model, we evaluate the relative efficiency of these two types of mechanisms and study whether it is worth combining the two. Green subsidies alone cannot achieve ambitious carbon mitigation targets. Combining the two policies allows to reach a GDP optimum for a given mitigation target. Green subsidies overcome the problems of loss of competitiveness and carbon leakage arising from carbon pricing. A portion of carbon pricing revenues are redistributed to make this measure more socially acceptable. Finally, we show that in the absence of international cooperation, countries have an incentive to make an excessive use of green subsidies.

Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:nse:ecosta:ecostat_2024_545_3

DOI: 10.24187/ecostat.2024.545.2128

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