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Working Paper
Time-Limited Subsidies: Optimal Taxation with Implications for Renewable Energy Subsidies
Pigouvian subsidies are efficient, but output subsidies with uncertain or limited durations are not Pigouvian. We show that optimal “time-limited” policies must also subsidize investment to correct externalities generated after the output subsidy ends. Furthermore, an output subsidy’s optimal duration is characterized by the change in production when it ends. In the wind-energy industry, we find that power generation decreases by 5-10% after the end of facilities’ ten-year eligibility for the Renewable Energy Production Tax Credit. This behavioral response has implications for energy ...
Working Paper
Pollution Taxes and Clean Subsidies in an Open Economy
In open economies, the effectiveness of carbon taxes is diminished by “pollution leakage,” where some polluting activity shifts abroad because of the tax. This paper shows that the same conditions that lead to pollution leakage enhance the efficacy of clean subsidies. As a result, the optimal policy in an open economy combines a pollution tax and a clean subsidy, the balance of which depends on the leakage rate. Furthermore, efficient policy sets the sum of the tax and subsidy rates, a measure of policy ambition, equal to the marginal damages from pollution, and does not depend on the ...