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Nonrefundable Tax Credits versus Grants: The Impact of Subsidy Form on the Effectiveness of Subsidies for Renewable Energy

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  • Sarah Johnston

Abstract

I study wind energy investment and the impact of awarding subsidies as nonrefundable tax credits rather than as grants. Firms can only use nonrefundable tax credits to reduce taxes. This feature may reduce the relative value of tax credits to wind developers. As a result, policies to stimulate investment through nonrefundable tax credits may be less effective than awarding subsidies as grants. To quantify the trade-off between investment subsidies, I take advantage of a temporary program that allowed wind developers to choose between a production-based, nonrefundable tax credit and a cost-based grant. I exploit geographic variation in productivity across wind projects to estimate a model of subsidy choice and infer that wind developers valued a dollar of nonrefundable tax credits the same as $0.85 of a grant. I also find evidence consistent with nonrefundable tax credit subsidies favoring incumbents, which are more likely to owe taxes than new entrants.

Suggested Citation

  • Sarah Johnston, 2019. "Nonrefundable Tax Credits versus Grants: The Impact of Subsidy Form on the Effectiveness of Subsidies for Renewable Energy," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 6(3), pages 433-460.
    • Handle: RePEc:ucp:jaerec:doi:10.1086/702736
    DOI: 10.1086/702736
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    Cited by:

    1. Aldy, Joseph E. & Burtraw, Dallas & Fischer, Carolyn & Fowlie, Meredith & Williams, Roberton C. & Cropper, Maureen L., 2022. "How is the U.S. Pricing Carbon? How Could We Price Carbon?," Journal of Benefit-Cost Analysis, Cambridge University Press, vol. 13(3), pages 310-334, October.
    2. Justin B. Winikoff & Dominic P. Parker, 2024. "Farm size, spatial externalities, and wind energy development," American Journal of Agricultural Economics, John Wiley & Sons, vol. 106(4), pages 1518-1543, August.
    3. Yu, Chin-Hsien & Wu, Xiuqin & Lee, Wen-Chieh & Zhao, Jinsong, 2021. "Resource misallocation in the Chinese wind power industry: The role of feed-in tariff policy," Energy Economics, Elsevier, vol. 98(C).
    4. Guo, Wen & Yang, Bo & Ji, Jiong & Liu, Xiaorui, 2023. "Green finance development drives renewable energy development: Mechanism analysis and empirical research," Renewable Energy, Elsevier, vol. 215(C).
    5. Petersen, Claire & Reguant, Mar & Segura, Lola, 2024. "Measuring the impact of wind power and intermittency," Energy Economics, Elsevier, vol. 129(C).

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