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Subsidizing Renewable Energy under Capital Mobility

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  • Thomas Eichner
  • Marco Runkel

Abstract

This paper provides a rationale for subsidizing green (renewable) energy production. Within a multi-country model where energy is produced with mobile capital in green and dirty production, we investigate the countries’ decentralized choice of emissions taxes and green energy subsidies. Without green subsidies, the emissions tax is set inefficiently low, since each country ignores the environmental externality inflicted on other countries and since the emissions tax leads to a capital outflow to other countries. When the green subsidy is available, countries choose a positive subsidy rate since this reduces the overall distortion of the tax-subsidy system. In doing so, each country internalizes a larger part of the environmental externality. As consequence capital is relocated from the dirty into the clean sectors and reduces global pollution. Hence, the subsidy is not only beneficial for the country which imposes it but for all countries.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3185.

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Date of creation: 2010
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Handle: RePEc:ces:ceswps:_3185

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Keywords: renewable energy; capital mobility; green subsidy; emissions regulation;

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References

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  1. Hikaru Ogawa & David E. Wildasin, 2007. "Think Locally, Act Locally: Spillovers, Spillbacks, and Efficient Decentralized Policymaking," CESifo Working Paper Series 2142, CESifo Group Munich.
  2. A. Denny Ellerman & Nick Johnstone & Friedrich Schneider & Alexander F. Wagner & Juan-Pablo Montero & Johann Wackerbauer, 2003. "Tradable Permits," CESifo Forum, Ifo Institute for Economic Research at the University of Munich, vol. 4(1), pages 3-32, October.
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  4. Wilson, John D., 1986. "A theory of interregional tax competition," Journal of Urban Economics, Elsevier, vol. 19(3), pages 296-315, May.
  5. Lehmann, Paul, 2009. "Climate Policies with Pollution Externalities and Learning Spillovers," MPRA Paper 21353, University Library of Munich, Germany.
  6. Thomas Eichner & Rüdiger Pethig, 2010. "International carbon emissions trading and strategic incentives to subsidize green energy," Volkswirtschaftliche Diskussionsbeiträge 142-10, Universität Siegen, Fakultät Wirtschaftswissenschaften, Wirtschaftsinformatik und Wirtschaftsrecht.
  7. Markusen, James R. & Morey, Edward R. & Olewiler, Nancy, 1995. "Competition in regional environmental policies when plant locations are endogenous," Journal of Public Economics, Elsevier, vol. 56(1), pages 55-77, January.
  8. Zodrow, George R. & Mieszkowski, Peter, 1986. "Pigou, Tiebout, property taxation, and the underprovision of local public goods," Journal of Urban Economics, Elsevier, vol. 19(3), pages 356-370, May.
  9. Markusen James R. & Morey Edward R. & Olewiler Nancy D., 1993. "Environmental Policy when Market Structure and Plant Locations Are Endogenous," Journal of Environmental Economics and Management, Elsevier, vol. 24(1), pages 69-86, January.
  10. Bläsi, Albrecht & Requate, Till, 2007. "Subsidies for Wind Power: Surfing down the Learning Curve?," Economics Working Papers 2007,28, Christian-Albrechts-University of Kiel, Department of Economics.
  11. Motta, Massimo & Thisse, Jacques-Francois, 1994. "Does environmental dumping lead to delocation?," European Economic Review, Elsevier, vol. 38(3-4), pages 563-576, April.
  12. Hoel, Michael, 1997. " Environmental Policy with Endogenous Plant Locations," Scandinavian Journal of Economics, Wiley Blackwell, vol. 99(2), pages 241-59, June.
  13. Fischer, Carolyn & Newell, Richard G., 2008. "Environmental and technology policies for climate mitigation," Journal of Environmental Economics and Management, Elsevier, vol. 55(2), pages 142-162, March.
  14. Oates, Wallace E. & Schwab, Robert M., 1988. "Economic competition among jurisdictions: efficiency enhancing or distortion inducing?," Journal of Public Economics, Elsevier, vol. 35(3), pages 333-354, April.
  15. Thomas Eichner & Rüdiger Pethig, 2010. "Efficient Management of Insecure Fossil Fuel Imports through Taxing (!) Domestic Green Energy?," CESifo Working Paper Series 3062, CESifo Group Munich.
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Cited by:
  1. May Elsayyad & Kai A. Konrad, 2011. "Fighting Multiple Tax Havens," Working Papers fighting_multiple_tax_hav, Max Planck Institute for Tax Law and Public Finance.

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