Market Structure and Technology Diffusion Incentives under Emission Taxes and Emission Reduction Subsidies

This paper compares emission taxes with emission reduction subsidies regarding the incentives they create to enhance technology diffusion under imperfect competition. Firms can adopt a »dirty« technology or a »clean« abatement technology. If the clean and dirty products are perfect substitutes, and clean firms face a net absolute advantage over dirty firms, taxes provide the strongest incentive. This ranking is reversed if there is a distortion on output. Subsidies can neutralize this distortion because output supply is stimulated, which would normally be lower than optimal under perfect competition.