Abstract: Introducing heterogeneous R&D subsidies into a two-sector technological model, this study investigates the effect of subsidies and directed technologies on environmental quality, and estimates the dynamic process of technological change direction and environmental quality with heterogeneous subsidies on China's auto industry. The results show that both clean and non-clean technologies have a strong effect on environmental quality: non-clean technology could improve environmental quality by promoting energy efficiency and environment benefits from clean technology by increasing new energy vehicles. However, it is difficult for clean technology to substitute non-clean technology as dominated technological application. R&D subsidies can change technological direction to affect environmental quality. In addition, non-clean R&D subsidies are found to improve environmental quality in a better way in the initial 15 years during the simulation period, but clean R&D subsidies prove to be more effective to improve environmental quality in the long run. (C) 2019 Elsevier Ltd. All rights reserved.

Keywords: Heterogeneous R&D subsidies; Technological change; Environmental quality