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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.
  • 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. Carsten Helm & Mathias Mier, 2020. "Steering the Energy Transition in a World of Intermittent Electricity Supply: Optimal Subsidies and Taxes for Renewables Storage," ifo Working Paper Series 330, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    3. 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.
    4. Carsten Helm & Mathias Mier, 2018. "Subsidising Renewables but Taxing Storage? Second-Best Policies with Imperfect Pricing," Working Papers V-413-18, University of Oldenburg, Department of Economics, revised Oct 2018.
    5. Wen, Xingang & Hagspiel, V. & Kort, Peter, 2017. "Subsidized Capacity Investment under Uncertainty," Discussion Paper 2017-043, Tilburg University, Center for Economic Research.
    6. 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.
    7. Haan, Peter & Simmler, Martin, 2018. "Wind electricity subsidies — A windfall for landowners? Evidence from a feed-in tariff in Germany," Journal of Public Economics, Elsevier, vol. 159(C), pages 16-32.
    8. Nicholas Lee & Hsiang-Jane Su & Ming-Chin Lin, 2018. "Electricity Consumption and Green Mortgage: New Insights into the Threshold Cointegration Relationship," International Journal of Energy Economics and Policy, Econjournals, vol. 8(2), pages 39-46.
    9. Helm, Carsten & Mier, Mathias, 2019. "Subsidising Renewables but Taxing Storage? Second-Best Policies with Imperfect Carbon Pricing," Annual Conference 2019 (Leipzig): 30 Years after the Fall of the Berlin Wall - Democracy and Market Economy 203539, Verein für Socialpolitik / German Economic Association.
    10. Fabio Antoniou & Roland Strausz, 2017. "Feed-in Subsidies, Taxation, and Inefficient Entry," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 67(4), pages 925-940, August.
    11. Shahsavari, Amir & Akbari, Morteza, 2018. "Potential of solar energy in developing countries for reducing energy-related emissions," Renewable and Sustainable Energy Reviews, Elsevier, vol. 90(C), pages 275-291.

    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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