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Abstract
A two-country, three-good general equilibrium model is developed to examine
the welfare and environmental effects for countries (North and South) of demand
subsidies (a feed-in tariff) to renewable energy equipment, as well as tariffs on
renewable energy equipment imports. Both North and South renewable energy
equipment producers engage in Cournot duopoly competition with a homogeneous
product in both countries. Both countries also produce polluting fossilfuel-
generated electricity and a numeraire good. We show, inter alia, that an
endogenous Northern import tariff is increasing in (independent of) a Northern
(Southern) feed-in tariff premium, even if the North government does not internalize
any pollution harm. A Northern feed-in tariff premium may hurt domestic
environment due to a rebound effect and it may also hurt Southern welfare.1