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Investment versus Output Subsidies: Implications of Alternative Incentives for Wind Energy

Author

Listed:
  • Joseph E. Aldy
  • Todd D. Gerarden
  • Richard L. Sweeney

Abstract

This study examines the choice between subsidizing investment and subsidizing output to promote socially desirable production. We exploit a natural experiment to estimate the impact of subsidy margin on the productivity of wind farms. Using instrumental variable and matching estimators, we find that investment subsidy claimants produce 10%–12% less power than they would have under the output subsidy. Accounting for extensive margin effects, we show that output subsidies are more cost-effective than investment subsidies over a large range of output targets.

Suggested Citation

  • Joseph E. Aldy & Todd D. Gerarden & Richard L. Sweeney, 2023. "Investment versus Output Subsidies: Implications of Alternative Incentives for Wind Energy," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 10(4), pages 981-1018.
    • Handle: RePEc:ucp:jaerec:doi:10.1086/723142
    DOI: 10.1086/723142
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    Cited by:

    1. Bartlett, Jay, 2023. "Beyond Subsidy Levels: The Effects of Tax Credit Choice for Solar and Wind Power in the Inflation Reduction Act," RFF Reports 23-20, Resources for the Future.
    2. Severin Borenstein & Ryan Kellogg, 2023. "Carbon Pricing, Clean Electricity Standards, and Clean Electricity Subsidies on the Path to Zero Emissions," Environmental and Energy Policy and the Economy, University of Chicago Press, vol. 4(1), pages 125-176.
    3. Wu, Ting & Yang, Shuwang & Tan, Jingjing, 2020. "Impacts of government R&D subsidies on venture capital and renewable energy investment -- an empirical study in China," Resources Policy, Elsevier, vol. 68(C).
    4. Chihiro YAGI & Kenji TAKEUCHI, 2025. "Light after the darkness: Estimating the impact of power outages on subsequent solar installations," Discussion papers e-25-010, Graduate School of Economics , Kyoto University.
    5. Bianchi, Mattia & Murtinu, Samuele & Scalera, Vittoria G., 2019. "R&D Subsidies as Dual Signals in Technological Collaborations," Research Policy, Elsevier, vol. 48(9), pages 1-1.
    6. Iwona Bąk & Anna Spoz & Magdalena Zioło & Marek Dylewski, 2021. "Dynamic Analysis of the Similarity of Objects in Research on the Use of Renewable Energy Resources in European Union Countries," Energies, MDPI, vol. 14(13), pages 1-24, July.
    7. Kalouptsidi, Myrto & Barwick, Panle Jia & Zahur, Nahim Bin, 2019. "China’s Industrial Policy: an Empirical Evaluation," CEPR Discussion Papers 13889, C.E.P.R. Discussion Papers.
    8. Josse Delfgaauw & Otto H. Swank, 2023. "The Political Economy of Commitment to Policies," Tinbergen Institute Discussion Papers 23-060/VII, Tinbergen Institute.
    9. Delfgaauw, Josse & Swank, Otto, 2025. "The Political Economy of (Lacking) Commitment to Green Policies," Journal of Environmental Economics and Management, Elsevier, vol. 130(C).
    10. Lee, Jonathan M. & Howard, Gregory, 2021. "The impact of technical efficiency, innovation, and climate policy on the economic viability of renewable electricity generation," Energy Economics, Elsevier, vol. 100(C).
    11. Justin B. Winikoff & Dominic P. Parker, 2024. "Farm size, spatial externalities, and wind energy development," American Journal of Agricultural Economics, John Wiley & Sons, vol. 106(4), pages 1518-1543, August.
    12. Beaudoin, Justin & Chen, Yuan & Heres, David R. & Kheiravar, Khaled H. & Lade, Gabriel E. & Yi, Fujin & Zhang, Wei & Lin Lawell, C.-Y. Cynthia, 2018. "Environmental Policies in the Transportation Sector: Taxes, Subsidies, Mandates, Restrictions, and Investment," ISU General Staff Papers 201808150700001050, Iowa State University, Department of Economics.
    13. Panle Jia Barwick & Myrto Kalouptsidi & Nahim Bin Zahur, 2019. "China’s Industrial Policy: an Empirical Evaluation," NBER Working Papers 26075, National Bureau of Economic Research, Inc.
    14. Bruno Lanz and Evert Reins, 2021. "Asymmetric Information on the Market for Energy Efficiency: Insights from the Credence Goods Literature," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4).
    15. Gomez-Trejos, Felipe, 2025. "A note on energy sourcing and Federal Tax Credits to wind investments," Economics Letters, Elsevier, vol. 252(C).
    16. Böning, Justus & Bruninx, Kenneth & Ovaere, Marten & Pepermans, Guido & Delarue, Erik, 2025. "The effectiveness of future financial benefits on PV adoption — Evidence from Belgium," Energy Economics, Elsevier, vol. 142(C).
    17. Leary, Nick & Zunino, Michael & Wagner, Jeffrey, 2025. "The marginal abatement cost function with secondary waste markets," Ecological Economics, Elsevier, vol. 228(C).
    18. Melita Van Steenberghe & Marten Ovaere, 2025. "Market Inefficiencies in Renewable Support Policies: Evidence from Offshore Wind Contracts for Difference in Great Britain," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 25/1124, Ghent University, Faculty of Economics and Business Administration.
    19. Natalia Fabra & Gerard Llobet, 2025. "The Costs of Counterparty Risk in Long-Term Contracts," Working Papers wp2025_2523, CEMFI.

    More about this item

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

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