Subsidies, Tariffs and Investments in the Solar Power Market

Over the last 10 years, the solar photovoltaic (PV) market has experienced tremendous growth due in part to government incentive programs. This paper estimates a dynamic model to understand the impact of these programs on residential solar installations and evaluates the impact of alternative incentive policies. The model separately evaluates the effect of up-front subsidies, tax credits and production revenues using a 5-year dataset collected by the California Solar Initiative program, which subsidized solar installations in California. The results indicate that capacity-based subsidies are equally effective as production-based subsidies, but that the latter are more efficient. With a $100 social cost of carbon, the total subsidies in California would be welfare neutral. If California were only as sunny as Frankfurt, Germany and to maintain the current amount of solar electricity production, this value has to be $600 to be welfare neutral. I find that without subsidies, 85% of the existing installations would not have occurred. If the pending antidumping tariff on imported Chinese solar cells raises the domestic module price by 25%, we could expect to see a 30% reduction in the solar power system investments.