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

Owen Kay () and Michael David Ricks ()

No 2530, Working Papers from Federal Reserve Bank of Dallas

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.

Keywords: energy taxes and subsidies; renewable energy; optimal taxation; policy uncertainty (search for similar items in EconPapers)
JEL-codes: H21 H23 Q48 (search for similar items in EconPapers)
Pages: 82
Date: 2025-08-05
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Persistent link: https://EconPapers.repec.org/RePEc:fip:feddwp:101407

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DOI: 10.24149/wp2530

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