October 4, 2010

Subsidizing Renewable Energy under Capital Mobility

by Thomas Eichner and Marco Runkel

- This paper provides a rationale for subsidizing green (renewable) energy production. Within a multi-country model where energy is produced with mobile capital in green and dirty production, we investigate the countries’ decentralized choice of emissions taxes and green energy subsidies. Without green subsidies, the emissions tax is set inefficiently low, since each country ignores the environmental externality inflicted on other countries and since the emissions tax leads to a capital outflow to other countries.

Eichner, T. and M. Runkel (2010). "Subsidizing Renewable Energy under Capital Mobility." CESifo Working Paper No. 3185, Sept 2010.