Time-Limited Subsidies: Optimal Taxation with Implications for Renewable Energy Subsidies
with Michael Ricks
Forthcoming at The Journal of Political Economy
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.
Pollution Taxes and Clean Subsidies in an Open Economy (Job Market Paper)
Abstract: In open economies, the effectiveness of taxing a global pollutant is diminished by "pollution leakage," where some polluting activity shifts abroad as a result of the tax. This paper shows that the same economic conditions that lead to pollution leakage enhance the efficacy of clean subsidies. As a result, the optimal policy in an open economy is a combination of a pollution tax and a clean subsidy, the balance of which depends on the leakage rate. Furthermore, efficient corrective policy sets the sum of the tax and subsidy rates, a measure of policy ambition, equal to the marginal damages from pollution, and therefore does not depend on the leakage rate.
Abstract: We use close elections in parliamentary democracies as natural experiments to estimate public debt levels’ effects on real interest rates. An election in which no party achieves a majority causes the debt-to-GDP ratio to increase by 17 percentage points over the following five years relative to an election in which one party barely secures a majority. Real interest rates rise by a relative 99 basis points following such an election, implying that a one percentage point increase in the debt-to-GDP ratio causes a 5.8 basis point increase in real rates. That effect is larger than most previous estimates.
with Dasom Ham and Catie Hausman
Abstract: The US electrical grid is experiencing a rapid transition as cheap renewable electricity transforms the energy mix. With these grid changes, new supply is not spatially matched to demand, and the transmission network has become more strained. Better market integration could thus lower US generation costs. This report estimates the excess generation costs associated with transmission congestion and other spatial constraints across the lower 48 states, as an extension of a 2024 report on the MISO/SPP regions. We document that eliminating interregional constraints would have reduced generation costs by $5.8–7.1 billion in 2022 and $3.4–5.0 billion in 2023. Despite these overall potential cost savings, we show that market integration creates winners and losers among generation companies—of interest because generators have a large say in whether transmission projects are developed. We show clear spatial patterns in generation company outcomes, documenting that producers in some regions have incentives to delay or block grid integration despite the overall system benefits.