Optimal Solar Subsidies

We study the spatial misallocation resulting from subsidies for residential solar panels in the US and quantify the associated environmental costs. We build a structural model of solar panel demand and electricity production across the country and estimate the model by combining 1) remotely sensed data on residential solar panels, 2) power-plant-level data on hourly production and emissions, and 3) a state-of-the-art air pollution model. The current subsidies lead to severe spatial misallocation. The optimal cost-neutral reform generates environmental benefits equal to those of a 6-11% increase in the productivity of residential solar panels nationally