6.2.2.6 Subsidies and Other Incentives
6.2.2.6.1 Environmental Subsidies
A subsidy for GHG emissions reduction pays entities a specific amount per tonne
of CO2eq for every tonne of GHG reduced or sequestered. Such a subsidy
encourages implementation of measures to reduce emissions or enhance sequestration
that are less costly than the subsidy.
Under certain circumstances, a uniform subsidy can lead to the same emissions
reduction outcome as an equivalent uniform tax. In theory, in an industry with
homogeneous firms, both taxes and subsidies (set at the same levels) yield exactly
the same outcome in the short run. In general, a tax is more efficient than
a subsidy because the subsidy can result in too many firms in the industry,
and thus an inefficient amount of both pollution and goods associated with the
pollution (Kolstad, 2000). This is always the case in the long run because a
subsidy lowers the average cost of production, while the tax increases the average
cost of production. In the short run, it is also the case in an industry with
heterogeneous firms. A subsidy may allow some firms to continue operating that
would not continue in the case of a tax (those with average variable costs above
prices). Besides, a subsidy requires that revenue be raised somewhere else in
the economy, which can also produce dead-weight losses.
An emissions reduction subsidy, like an emissions tax, does not guarantee a
particular level of emissions. Therefore, it may be necessary to adjust the
subsidy level to meet an internationally agreed emissions commitment. In addition,
criteria other than efficiency, such as distributional impacts, are likely to
influence the design of the emissions subsidy (or the combination of subsidies
and taxes in what is known as fee and/or rebate). The distributional and competitiveness
impacts help explain why, in practice, some energy and emissions taxes are coupled
with tax exemptions or subsidies. Also, the use of subsidies for environmental
purposes may cause problems under WTO agreements on subsidies and countervailing
measures.
6.2.2.6.2 Research and Development Policies
Technological progress is mainly achieved in the private sector, through learning
by doing, incorporating new findings developed elsewhere into the production
process, or through firms own R&D activities. A major, and generally increasing,
part of funding of R&D expenditures is initiated by and in the private sector
itself (Table 6.1). Government funding of R&D on energy
has historically favoured nuclear and coal technologies (IEA, 1998a; OECD, 1998a).
Research on renewable energy and energy-efficient technologies is gaining ground,
but it is still a relatively small portion of R&D budgets in the OECD. This
is important when assessing what governments can do to promote innovation. Perhaps
governments can provide a reliable legal framework to protect research findings
in the area of energy efficiency improvement from being copied elsewhere without
compensation.58
Table 6.1: Public expenditures as percentage of
gross domestic expenditures on R&D (19851995) (OECD, 1998a) |
|
Country/ region |
1985 Public % of total |
1990 Public % of total |
1995 Public % of total |
|
Overall OECD |
43.0 |
37.8 |
34.5 |
USA |
50.3 |
43.8 |
36.1 |
Canada |
48.9 |
44.3 |
37.7 |
EU |
44.4 |
40.9 |
33.1 |
UK |
42.2 |
35.5 |
33.3 |
France |
52.9 |
48.3 |
|
Japan |
21.0 |
|
22.4 |
Germany |
37.6 |
33.9 |
37.1 |
South Korea |
|
17.0 |
18.2 |
Czech Republic |
|
30.6 |
34.9 |
India |
88.5 |
87.3 |
84.6 |
|
|