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

Michael David Ricks and Owen Kay

Journal of Political Economy, 2025, vol. 133, issue 12, 3801 - 3845

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’ 10-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.

Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
http://dx.doi.org/10.1086/738139 (application/pdf)
http://dx.doi.org/10.1086/738139 (text/html)
Access to the online full text or PDF requires a subscription.

Related works:
Working Paper: Time-Limited Subsidies: Optimal Taxation with Implications for Renewable Energy Subsidies (2025)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ucp:jpolec:doi:10.1086/738139

Access Statistics for this article

More articles in Journal of Political Economy from University of Chicago Press
Bibliographic data for series maintained by Journals Division ().