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Imperfect competition within the pollution abatement equipment
sector may hinder the Paris Agreement’s goals. We show that carbon
tax–funded environmental subsidies can stimulate firm entry,
enhance competition, and lower abatement costs for businesses.
Using a quantitative macro-climate model with an endogenous
market structure for abatement equipment, we estimate that optimally
allocating subsidies (60% to startups and 40% to existing
companies) could enhance efficiency, generating annual global
GDP savings of $2.5 to $3.1 trillion by 2060.
