Although subsidizing policies are not highly evaluated in environmental economics since they are contrary to “The Polluter Pays Principle” and there is a budget constraint, many countries have in practice introduced several subsidizing policies and some of them have been effective in promoting investments to a certain degree.
This paper explores the conditions under which subsidizing policies are effective in diffusing new technologies using a case of a Swedish subsidizing policy, “the local investment program” (LIP) 1998-2002. In the LIP scheme, municipalities make an investment program for environmental protection in their region and subsidies are granted to excellent programs after screening by the Swedish government. An investment program in general consists of several projects by municipal authorities, municipal companies, private companies and so on. One of the features of the LIP is that subsidies are granted to each project through municipalities, so in order for private companies, individuals and other organization to obtain subsidies their projects have to be included in a program by the municipality.
Most projects would not have been implemented without LIP subsidies, so we could evaluate the LIP promoted additional investments. But there were not many projects using new technologies although it was at first one of the purposes of the LIP. The reasons could be attributed to the fact that the LIP subsidies were granted through municipalities and to win the race for subsidies municipalities tended to avoid including projects with high uncertainty in their program. The competition among municipalities, which had been considered to promote unique programs, might prevent municipalities from introducing projects with new technologies in this case.
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