Working Paper: NBER ID: w18924
Authors: Garth Heutel; David L. Kelly
Abstract: Government policies that are not intended to address environmental concerns can nonetheless distort prices and affect firms' emissions. We present an analytical general equilibrium model to study the effect of distortionary subsidies on factor prices and on environmental outcomes. We model an output subsidy, a capital subsidy, relief from environmental regulation, and a direct cash subsidy. In exchange for receiving subsidies, firms must agree to a minimum level of labor employment. Each type of subsidy and the employment constraint create both output effects and substitution effects on input prices and emissions. We calibrate the model to the Chinese economy, where government involvement affects emissions from both state-owned enterprises and private firms. Variation in production substitution elasticities does not substantially affect input prices, but it does substantially affect emissions.
Keywords: distortionary subsidies; environmental outcomes; general equilibrium model; China; emissions
JEL Codes: H23; Q52; Q58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| output subsidies (H23) | increase in demand for all inputs (J23) |
| increase in demand for all inputs (J23) | increase in emissions (O44) |
| minimum labor constraint (J89) | negative profits (D22) |
| negative profits (D22) | need for direct cash subsidies (H53) |
| subsidies tied to specific inputs (H20) | increase in demand for those inputs (J23) |
| increase in demand for those inputs (J23) | substitution effect that elevates emissions (H23) |
| subsidized sector is more capital-intensive (D24) | subsidies disproportionately affect labor and capital prices (H23) |
| subsidies disproportionately affect labor and capital prices (H23) | increased emissions (F64) |