Time-Limited Subsidies: Optimal Taxation with Implications for Renewable Energy Subsidies

54 Pages Posted: 27 Mar 2023

See all articles by Owen Kay

Owen Kay

University of Michigan, Department of Economics

Michael Ricks

University of Nebraska at Lincoln - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: January 17, 2023

Abstract

Pigouvian subsidies are efficient, but subsidies with limited durations are not Pigouvian. When using "time-limited" output subsidies, the optimal policy subsidizes output and investment, where investment subsidies separately correct for the limit. Because the change in production when the subsidy ends is a sufficient statistic for the optimal duration, we estimate this statistic using the US Renewable Energy Production Tax Credit for wind energy. Wind facilities reduce generation by 5-10% when the ten-year subsidy ends, demonstrating that time limits distort production even in inelastic industries, and suggesting that adapting to limits is key to improving industrial policy elsewhere.

Keywords: corrective taxation, alternative energy, optimal tax

JEL Classification: H21, H23, Q42

Suggested Citation

Kay, Owen and Ricks, Michael, Time-Limited Subsidies: Optimal Taxation with Implications for Renewable Energy Subsidies (January 17, 2023). Available at SSRN: https://ssrn.com/abstract=4392340 or http://dx.doi.org/10.2139/ssrn.4392340

Owen Kay

University of Michigan, Department of Economics ( email )

Michael Ricks (Contact Author)

University of Nebraska at Lincoln - Department of Economics ( email )

Lincoln, NE 68588-0489
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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