Environmental policy choice: Pollution abatement subsidies

This paper first shows that subsidies to the input into pollution abatement are inefficient when a Pigouvian pollution tax is available. Using a model where the government receives political contributions from environmental and industry lobby groups, it then explains the use of pollution abatement subsidies in environmental policy as primarily being tools for redistribution. The pollution abatement subsidy and pollution tax are determined in political equilibrium. The equilibrium subsidy rate is shown to depend on the subsidy elasticities of pollution and abatement, and lobby group membership.