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| Iacopo Grassi |
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| ''Subsidies, costs, and local taxes: a theoretical note on circular economy investments'' |
| ( 2026, Vol. 46 No.1 ) |
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| This paper develops a theoretical model to examine how investment subsidies for circular economy projects influence local taxation in decentralized governance systems.
When environmental infrastructure is co-financed by higher-level governments but operated locally, fiscal effects depend on how investments modify cost structures.
Using a principal–agent framework, I show that the relationship between subsidies and local taxes is non-monotonic: at low investment levels, subsidies reduce costs and taxes, but beyond the efficiency threshold, further investment raises operational complexity and fiscal pressure.
A dynamic extension incorporating transition costs explains why local taxes may temporarily increase before efficiency gains materialize.
The model offers a tractable framework to interpret the fiscal implications of circular economy policies within multi-level European governance, with specific relevance to current EU funding schemes. |
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| Keywords: Circular economy, Investment subsidies, Local taxation, Fiscal trade-offs, Environmental governance |
JEL: H2 - Taxation, Subsidies, and Revenue: General
Q5 - Environmental Economics: General |
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| Manuscript Received : Oct 08 2025 | | Manuscript Accepted : Mar 30 2026 |
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