On reducing the windfall profits in environmental subsidy programs

Investment subsidies are widely used to induce adoption of new technologies that can lower the (marginal) cost of reducing emissions. To economize on these subsidies, governments would like to distinguish between firms that need to receive a subsidy to adopt a new technology, and firms that would adopt that technology even without subsidies. We show that policies consisting of a menu of emission taxes and investment subsidies can potentially induce firms to self-select.