Emissions subsidies

It has been suggested that eliminating coal production subsidies could substantially reduce global carbon emissions. This paper finds otherwise. Using a dynamic model of the international coal market, the paper investigates the consequences of subsidy elimination in a model incorporating sector specific capital constraints. In the short-run, following elimination of subsidies, producers with excess capacity divert domestic production into the export market, softening price increases. Over time, low cost exporters gain market share from the swing supplier, which further attenuates the market response to subsidy elimination. Given this market structure, production subsidy elimination in Europe and Japan may reduce world steam coal demand by as little as 0.5%, and global emissions by only 0.2