CAN SUBSIDIES RATHER THAN POLLUTION TAXES BREAK THE TRADE-OFF BETWEEN ECONOMIC OUTPUT AND ENVIRONMENTAL PROTECTION?

Thomas I. Renström
Luca Spataro
Laura Marsiliani

We build a general equilibrium dynamic model in which individual investors are endowed with “warm-glow” preferences a la Andreoni (1990) so that they feel partly responsible for the pollution
content of their portfolio. Through investors’ portfolio choice, firms are induced to engage in costly abatement activities, given that higher pollution also implies a higher cost of capital. In this
scenario, we characterize the equilibrium of the economy and investigate, through a fiscal reform analysis, the effects of such tax instruments on the equilibrium scale of the economy, per-
capita consumption, pollution abatement and “pollution premium”. We show that an increase of the pollution tax, while reducing pollution, also depresses consumption, the scale of the economy
and the pollution premium. On the contrary, an increase of subsidies on abatement activity increases the scale of the economy and can also decrease pollution and the pollution premium and
increase per-capita consumption. All our results have relevant testable implications, which we leave for future empirical research.

Keywords: Socially responsible investment, corporate social responsibility, pollution, fiscal policies.

JEL classification: D21, D53, G11, H21, H23, M14, Q58.

Correspondence to:

T.I. Renström, Department of Economics and Finance, Durham University Business School, Mill Hill Lane, Durham, DH1 3LB, UK.
Tel: +44-(0)191-334 6369.
Email: [email protected] Web: http://www.dur.ac.uk/t.i.renstrom/

L. Spataro, Departimento di Economia e Management, Universita di Pisa, Via Cosimo Ridolfi 10, 56124 Pisa, Italy.
Email: [email protected] Web: http://people.unipi.it/luca_spataro/

L. Marsiliani, Department of Economics and Finance, Durham University Business School, Mill Hill Lane, Durham, DH1 3LB, UK.
Tel: +44-(0)191-334 6363.
Email: [email protected] Web: http://www.dur.ac.uk/laura.marsiliani/

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