IDEAS home Printed from https://ideas.repec.org/p/fip/feddwp/101407.html

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
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Torsten Persson & Lars E. O. Svensson, 1989. "Why a Stubborn Conservative would Run a Deficit: Policy with Time-Inconsistent Preferences," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 104(2), pages 325-345.
    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. Robert W. Hahn & Nathaniel Hendren & Robert D. Metcalfe & Ben Sprung-Keyser, 2026. "A Welfare Analysis of Policies Impacting Climate Change," American Economic Review, American Economic Association, vol. 116(7), pages 2368-2421, July.
    4. Langer, Ashley & Maheshri, Vikram & Winston, Clifford, 2017. "From gallons to miles: A disaggregate analysis of automobile travel and externality taxes," Journal of Public Economics, Elsevier, vol. 152(C), pages 34-46.
    5. Bas Jacobs, 2018. "The marginal cost of public funds is one at the optimal tax system," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 25(4), pages 883-912, August.
    6. Farrell, Joseph & Klemperer, Paul, 2007. "Coordination and Lock-In: Competition with Switching Costs and Network Effects," Handbook of Industrial Organization, in: Mark Armstrong & Robert Porter (ed.), Handbook of Industrial Organization, edition 1, volume 3, chapter 31, pages 1967-2072, Elsevier.
    7. Lohawala, Nafisa, 2023. "Roadblock or Accelerator? The Effect of Electric Vehicle Subsidy Elimination," RFF Working Paper Series 23-13, Resources for the Future.
    8. 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. 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.
    2. Mark Armstrong & Julian Wright, 2009. "Mobile Call Termination," Economic Journal, Royal Economic Society, vol. 119(538), pages 270-307, June.
    3. Johannes Johnen, 2019. "Automatic‐renewal contracts with heterogeneous consumer inertia," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 28(4), pages 765-786, November.
    4. Lam, W., 2015. "Switching Costs in Two-sided Markets," LIDAM Discussion Papers CORE 2015024, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    5. Borge, Lars-Erik, 2005. "Strong politicians, small deficits: evidence from Norwegian local governments," European Journal of Political Economy, Elsevier, vol. 21(2), pages 325-344, June.
    6. Støstad, Morten Nyborg & Cowell, Frank, 2024. "Inequality as an externality: Consequences for tax design," Journal of Public Economics, Elsevier, vol. 235(C).
    7. Christian Dahl Winther, 2007. "Optimal research effort and product differentiation in network industries," Economics Working Papers 2007-19, Department of Economics and Business Economics, Aarhus University.
    8. Tyrefors Hinnerich, Björn, 2009. "Do merging local governments free ride on their counterparts when facing boundary reform?," Journal of Public Economics, Elsevier, vol. 93(5-6), pages 721-728, June.
    9. Aouad, Marion, 2021. "An Examination of the Intracorrelation of Family Health Insurance," IZA Discussion Papers 14541, IZA Network @ LISER.
    10. Christian Roessler & Sandro Shelegia & Bruno Strulovici, 2018. "Collective Commitment," Journal of Political Economy, University of Chicago Press, vol. 126(1), pages 347-380.
    11. Reme Bjørn-Atle, 2019. "Competition in Markets with Quality Uncertainty and Network Effects," Review of Network Economics, De Gruyter, vol. 18(4), pages 205-242, December.
    12. Langus, Gregor & Lipatov, Vilen, 2008. "On Quantity Competition With Switching Costs," MPRA Paper 15457, University Library of Munich, Germany.
    13. Gilles Saint‐Paul & Davide Ticchi & Andrea Vindigni, 2016. "A Theory of Political Entrenchment," Economic Journal, Royal Economic Society, vol. 126(593), pages 1238-1263, June.
    14. Bouckaert, Jan & Degryse, Hans & Provoost, Thomas, 2010. "Enhancing market power by reducing switching costs," Economics Letters, Elsevier, vol. 109(2), pages 131-133, November.
    15. Mileva, Elitza & Siegfried, Nikolaus, 2012. "Oil market structure, network effects and the choice of currency for oil invoicing," Energy Policy, Elsevier, vol. 44(C), pages 385-394.
    16. Muscatelli, Vito A. & Natale, Piergiovanna & Tirelli, Patrizio, 2012. "A simple and flexible alternative to Stability and Growth Pact deficit ceilings. Is it at hand?," European Journal of Political Economy, Elsevier, vol. 28(1), pages 14-26.
    17. Mamkhezri, Jamal & Khezri, Mohsen, 2026. "Corrigendum to “Vehicle miles traveled induced demand, rebound effect, and price and income elasticities: A US spatial econometric analysis” [Trans. Pol. 158 (2024), 224–240]," Transport Policy, Elsevier, vol. 181(C).
    18. Mehmet Ekmekci & Alexander White & Lingxuan Wu, 2025. "Platform Competition and Interoperability: The Net Fee Model," Management Science, INFORMS, vol. 71(10), pages 8842-8864, October.
    19. John K.-H. Quah & Bruno Strulovici, 2013. "Discounting, Values, and Decisions," Journal of Political Economy, University of Chicago Press, vol. 121(5), pages 896-939.
    20. Andina-Díaz, Ascensión & Feri, Francesco & Meléndez-Jiménez, Miguel A., 2021. "Institutional flexibility, political alternation, and middle-of-the-road policies," Journal of Public Economics, Elsevier, vol. 204(C).

    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.