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Subsidy reduction policies in clean product promotion: Pre-announced or dynamic?

Author

Listed:
  • Wang, Jing
  • Lan, Yanfei
  • Xu, Shuxian
  • Zou, Hongyang
  • Du, Huibin

Abstract

Governments often use purchase subsidies to promote clean products, such as rooftop solar photovoltaic systems and new energy vehicles, aiming for clean development. However, purchase subsidies increase governments’ fiscal burden and create consumer over-reliance, with consumers delaying purchases in anticipation of higher future subsidies. To reduce policy costs and lessen consumers’ delayed purchases, governments attempt to implement a subsidy reduction policy that gradually reduces subsidy levels, with two options: pre-announced subsidy reduction (PS, where future subsidy plans are pre-announced) and dynamic subsidy reduction (DS, where governments announce a downward trend but adjust subsidy levels dynamically). We employ a two-period Stackelberg game model to investigate the optimal policy for promoting clean products. Both PS and DS alleviate delayed purchases, but the government’s subsidy strategies differ. Under PS, the government adopts a consistent subsidy strategy or follows a decreasing subsidy path, which lessens fiscal costs but at the expense of total sales of clean products. In contrast, under DS, the government maintains a consistent subsidy level over two periods, which rather increases the total adoption of clean products and contradicts the intuition that dynamic subsidy setting is meant for maintaining policy flexibility. Moreover, our comprehensive comparisons reveal a policy choice dilemma: the government should choose PS to prevent delayed purchases but DS to enhance the adoption of clean products. We suggest choosing the appropriate approach based on the market penetration of clean products: PS seems more favorable when sales of clean products are sufficiently high, while the opposite is true for DS.

Suggested Citation

  • Wang, Jing & Lan, Yanfei & Xu, Shuxian & Zou, Hongyang & Du, Huibin, 2025. "Subsidy reduction policies in clean product promotion: Pre-announced or dynamic?," Energy Economics, Elsevier, vol. 142(C).
  • Handle: RePEc:eee:eneeco:v:142:y:2025:i:c:s0140988325000052
    DOI: 10.1016/j.eneco.2025.108182
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    More about this item

    Keywords

    Purchase subsidy; Subsidy reduction policy; Delayed purchases; Clean development;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics
    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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