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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.

Suggested Citation

  • Thomas Eichner & Marco Runkel, 2010. "Subsidizing Renewable Energy under Capital Mobility," CESifo Working Paper Series 3185, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_3185
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Elsayyad, May & Konrad, Kai A., 2012. "Fighting multiple tax havens," Journal of International Economics, Elsevier, vol. 86(2), pages 295-305.
    2. Peter Haan & Martin Simmler, 2016. "Wind Electricity Subsidies = Windfall Gains for Land Owners? Evidence from Feed-In Tariff in Germany," Discussion Papers of DIW Berlin 1568, DIW Berlin, German Institute for Economic Research.
    3. Wen, Xingang & Hagspiel, V. & Kort, Peter, 2017. "Subsidized Capacity Investment under Uncertainty," Discussion Paper 2017-043, Tilburg University, Center for Economic Research.
    4. Yang, Dong-xiao & Chen, Zi-yue & Nie, Pu-yan, 2016. "Output subsidy of renewable energy power industry under asymmetric information," Energy, Elsevier, vol. 117(P1), pages 291-299.
    5. repec:eco:journ2:2018-02-5 is not listed on IDEAS
    6. repec:kap:enreec:v:67:y:2017:i:4:d:10.1007_s10640-016-0012-8 is not listed on IDEAS

    More about this item

    Keywords

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

    JEL classification:

    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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