Conference Agenda

I examine the optimal subsidy for renewable electricity in the absence of an optimal carbon tax. The current most common form of renewable subsidization, the fixed feed-in premium, provides a constant additive markup over wholesale prices. In contrast, the optimal subsidy encourages investment in the most socially valuable renewable production through a multiplicative markup over wholesale prices. In the baseline model, the optimal markup is easily calculable by policymakers, and the optimality of subsidies which increase with wholesale electricity price is robust to a wide range of extensions of the baseline model. Furthermore, I show that the optimal subsidy is preferred by risk-averse investors to a fixed feed-in premium.