Examining the Use of Subsidies for the Abatement of Greenhouse Gas Emissions through Experimental Simulations

Journal article, 2006

A market experiment was designed to empirically investigate the potential effectiveness of a governmental subsidy system to reduce sales and therefore production of environmentally harmful products. The important issue of whether the subsidy system preserves competitiveness was also examined. In the experiment two levels of a subsidy for unsold units were compared with no subsidy. To simulate the way in which subsidy levels may vary across time in real markets, the effects of high and low uncertainty regarding the subsidy level were also investigated. The results showed that subsidies, whether known and fixed or uncertain and varying, did not erode competition but nevertheless led to higher prices, which resulted in fewer sales. In the control condition a price war resulting in decreasing prices and increasing sales were observed. Several ways in which the proposed subsidy system may be implemented in the transport sector and other sectors are discussed. It is suggested that subsidies may make the adjustment process toward sustainable production less costly for the regulated parties.