Capital versus Output Subsidies: Implications of Alternative Incentives for Wind Investment

From a public finance perspective, is it better to subsidize inputs or outputs? We examine the choice between a capital subsidy and an output subsidy in the case of wind energy in the United States where, in some cases subsidies support investment in a specific technology, while in other cases subsidies support output from qualifying technologies. Exploiting a natural experiment in which wind farm developers could choose between investment and output subsidies, we estimate the impact of this choice on project productivity, and then use these estimates to evaluate the public economics of U.S. wind energy subsidies. Using a fuzzy regression discontinuity modeling framework, we find that wind farms choosing the capital grant realize 11% lower generation than those wind farms selecting the output subsidy. The Federal government expends about one-quarter more per kilowatt-hour of power produced under the capital subsidy than the output subsidy.