IDEAS home Printed from https://ideas.repec.org/p/fip/feddwp/101407.html
   My bibliography  Save this paper

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

Author

Listed:
  • Owen Kay

  • Michael David Ricks

Abstract

Pigouvian subsidies are efficient, but output subsidies with uncertain or limited durations are not Pigouvian. We show that optimal “time-limited” policies must also subsidize investment to correct externalities generated after the output subsidy ends. Furthermore, an output subsidy’s optimal duration is characterized by the change in production when it ends. In the wind-energy industry, we find that power generation decreases by 5-10% after the end of facilities’ ten-year eligibility for the Renewable Energy Production Tax Credit. This behavioral response has implications for energy transitions and highlights how time limits could cause larger distortions in more elastic industries.

Suggested Citation

  • Owen Kay & Michael David Ricks, 2025. "Time-Limited Subsidies: Optimal Taxation with Implications for Renewable Energy Subsidies," Working Papers 2530, Federal Reserve Bank of Dallas.
    • Handle: RePEc:fip:feddwp:101407
    DOI: 10.24149/wp2530
    as

    Download full text from publisher

    File URL: https://www.dallasfed.org/~/media/documents/research/papers/2025/wp2530.pdf
    File Function: Full text
    Download Restriction: no
    File URL: https://libkey.io/10.24149/wp2530?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Robert W. Hahn & Nathaniel Hendren & Robert D. Metcalfe & Ben Sprung-Keyser, 2024. "A Welfare Analysis of Policies Impacting Climate Change," NBER Working Papers 32728, National Bureau of Economic Research, Inc.
    2. Kopczuk, Wojciech, 2003. "A note on optimal taxation in the presence of externalities," Economics Letters, Elsevier, vol. 80(1), pages 81-86, July.
    3. Lohawala, Nafisa, 2023. "Roadblock or Accelerator? The Effect of Electric Vehicle Subsidy Elimination," RFF Working Paper Series 23-13, Resources for the Future.
    4. Kyle Handley & J. Frank Li, 2020. "Measuring the Effects of Firm Uncertainty on Economic Activity: New Evidence from One Million Documents," NBER Working Papers 27896, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Casey Rothschild & Florian Scheuer, 2014. "A Theory of Income Taxation under Multidimensional Skill Heterogeneity," NBER Working Papers 19822, National Bureau of Economic Research, Inc.
    2. Rafael Aigner, 2014. "Environmental Taxation and Redistribution Concerns," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 70(2), pages 249-277, June.
    3. O'Connell, Martin & Smith, Kate, 2020. "Corrective Tax Design and Market Power," CEPR Discussion Papers 14582, C.E.P.R. Discussion Papers.
    4. Bryan Bollinger & Kenneth Gillingham & A. Justin Kirkpatrick, 2025. "Valuing Solar Subsidies," NBER Working Papers 33368, National Bureau of Economic Research, Inc.
    5. Wojciech Kopczuk, 2012. "Taxation of Intergenerational Transfers and Wealth," NBER Working Papers 18584, National Bureau of Economic Research, Inc.
    6. Earl L. Grinols & Peri Silva, 2012. "Intervention Efficiency, Incentive Symmetry, and Information," Development Working Papers 334, Centro Studi Luca d'Agliano, University of Milano, revised 16 Jul 2012.
    7. Saten Kumar & Yuriy Gorodnichenko & Olivier Coibion, 2023. "The Effect of Macroeconomic Uncertainty on Firm Decisions," Econometrica, Econometric Society, vol. 91(4), pages 1297-1332, July.
    8. Jay Lu & Yao Luo & Kota Saito & Yi Xin, 2024. "Did Harold Zuercher Have Time-Separable Preferences?," Papers 2406.07809, arXiv.org.
    9. Dejanir Silva, 2019. "Optimal Fiscal Consolidation in a Currency Union," 2019 Meeting Papers 1338, Society for Economic Dynamics.
    10. repec:pra:mprapa:116209 is not listed on IDEAS
    11. Paul Eckerstorfer, 2014. "Relative Consumption Concerns and the Optimal Tax Mix," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 16(6), pages 936-958, December.
    12. Micheletto, Luca, 2008. "Redistribution and optimal mixed taxation in the presence of consumption externalities," Journal of Public Economics, Elsevier, vol. 92(10-11), pages 2262-2274, October.
    13. De Borger, Bruno & Mayeres, Inge, 2007. "Optimal taxation of car ownership, car use and public transport: Insights derived from a discrete choice numerical optimization model," European Economic Review, Elsevier, vol. 51(5), pages 1177-1204, July.
    14. Koichiro Ito & James M. Sallee, 2018. "The Economics of Attribute-Based Regulation: Theory and Evidence from Fuel Economy Standards," The Review of Economics and Statistics, MIT Press, vol. 100(2), pages 319-336, May.
    15. Paul Eckerstorfer, 2013. "Optimal Redistributive Taxation in a Multiexternality Model," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 69(1), pages 115-128, March.
    16. Kamate, Vidya & Ranjan, Abhishek, 2025. "When less is not always more: Issue frequency and borrowing costs in commercial paper market," Economics Letters, Elsevier, vol. 254(C).
    17. Martin O'Connell & Kate Smith, 2024. "Optimal Sin Taxation and Market Power," American Economic Journal: Applied Economics, American Economic Association, vol. 16(4), pages 34-70, October.
    18. Wenting Song & Samuel Stern, 2022. "Firm Inattention and the Efficacy of Monetary Policy: A Text-Based Approach," Staff Working Papers 22-3, Bank of Canada.
    19. Stéphane Gauthier & Fanny Henriet, 2023. "Targeting Taxes on Local Externalities," Annals of Economics and Statistics, GENES, issue 151, pages 1-36.
    20. Lucas W. Davis & James M. Sallee, 2020. "Should Electric Vehicle Drivers Pay a Mileage Tax?," Environmental and Energy Policy and the Economy, University of Chicago Press, vol. 1(1), pages 65-94.
    21. Galinato, Gregmar I. & Yoder, Jonathan K., 2010. "An integrated tax-subsidy policy for carbon emission reduction," Resource and Energy Economics, Elsevier, vol. 32(3), pages 310-326, August.

    More about this item

    Keywords

    ;
    ;
    ;
    ;

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:feddwp:101407. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Amy Chapman (email available below). General contact details of provider: https://edirc.repec.org/data/frbdaus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.