Do emission subsidies reduce emission? In the context of environmental R&D organization

- The Poyago-Theotoky model is reexamined with the corrected range of damage parameter.
- Time-consistent emission tax/subsidy policy is always welfare-enhancing.
- Given slight environmental damage, the emission tax rate is invariably negative.
- An emission subsidy can yield less total emissions than under laissez-faire.

This paper, which reexamines the Poyago-Theotoky model, provides additional investigation that was conducted under a corrected environmental damage parameter. As new findings, we obtain the following. First, social welfare under a time-consistent emission tax (emission subsidy) policy is always welfare-enhancing rather than the case of laissez-faire. Second, if the environmental damage parameter is sufficiently small, then the equilibrium emission tax rate is invariably negative. It is therefore an emission subsidy. Moreover, total emissions under the emission subsidy scenario become less than those under laissez-faire if the damage parameter is sufficiently small, and if the R&D cost is low. However, total emissions under the emission subsidy become greater than those under laissez-faire if the damage parameter is sufficiently small, and if the R&D cost is high.