Pollution targets can also be attained using pollution abatement subsidies. A subsidy is a negative tax, so the incentive effects on firms already in the industry will be the same whether a subsidy of is given for each unit of pollution abated or a tax at the rate is levied on each unit of pollution emitted. The short term effects on emissions levels are identical.
The long run effects of taxes and subsidies are likely to be very different, however. This is because their income effects are different. Pollution taxes reduce the profitability of the affected industry, whereas subsidies increase profitability. Subsidies might, therefore encourage entry into the industry, decreasing the effectiveness of the control programme. The opposite effect will follow from tax schemes.
When subsidies for pollution abatement increase total emissions.: An article from: Southern Economic Journal
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