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Green capacity investment under subsidy withdrawal risk

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  • Nagy, Roel L.G.
  • Hagspiel, Verena
  • Kort, Peter M.

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Subsidies initially installed to stimulate green capacity investments tend to be withdrawn after some time.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.

Suggested Citation

  • Nagy, Roel L.G. & Hagspiel, Verena & Kort, Peter M., 2021. "Green capacity investment under subsidy withdrawal risk," Energy Economics, Elsevier, vol. 98(C).
    • Handle: RePEc:eee:eneeco:v:98:y:2021:i:c:s014098832100164x
    DOI: 10.1016/j.eneco.2021.105259
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