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Green capacity investment under subsidy withdrawal risk

Roel L.G. Nagy, Verena Hagspiel and Peter Kort

Energy Economics, 2021, vol. 98, issue C

Abstract: Subsidies initially installed to stimulate green capacity investments tend to be withdrawn after some time. This paper analyzes the effect on investment of this phenomenon in a dynamic framework with demand uncertainty. We find that increasing the probability of subsidy withdrawal incentivizes the firm to accelerate investment at the expense of a smaller investment size. A similar effect is found when subsidy size as such is increased. When subsidy withdrawal risk is zero or very limited, installing a subsidy could increase welfare. In general we get that the larger the subsidy withdrawal probability, the smaller the welfare maximizing subsidy rate is. Therefore, a policy maker aiming to maximize welfare should try to reduce subsidy withdrawal risk.

Keywords: Green energy; Subsidy; Investment under uncertainty; Dynamic public economics (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.eneco.2021.105259

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