Abstract
Subsidies and penalties are two main regulation methods adopted by authorities to promote the development of renewable energy. Due to the possibility of subsidy fraud, it is necessary to explore effective ways to combine these two policies. In this article, subsidy and penalty policies are incorporated into a sequential game theory model to explore the impact of different regulatory mechanisms on the promotion of renewable energy from recycled resources. We take biodiesel production from used cooking oil (UCO) as an example. UCO can be converted into environmentally friendly biodiesel or mixed with fresh cooking oil, resulting in inferior cooking oil containing harmful carcinogens but with huge profits. There are two mechanisms in the sequential combination model, spot checks after subsidy and subsidy after spot checks. Under both cases, fines are imposed if fraud is found during spot checks. The amounts of subsidies and fines also need to be determined. We show that the effects of subsidies depend on the implementation of the timing. The ex-ante subsidies have no effect. When spot checks are performed first, the larger subsidies will increase the probability of producing inferior cooking oil due to lower probability of spot checks. While combined with penalties, the ex-post subsidies have a positive effect on biodiesel production, that is, there exists synergy effect of penalty and subsidy on renewable energy production. In an infinitely repeated game, the shutdown threat of a grim trigger strategy (GTS) is much easier to induce biodiesel production than the penalty threat of a tit-for-tat strategy (TFT). When penalties are large enough, TFT can achieve the same goal of legal production effectively as GTS. The sooner illegal production is observed, the lower penalties are required to induce the processor to produce legally. Compared to subsidies, penalties are more effective in encouraging processors to produce renewable energy rather than illegal products. Moreover, our simulation results suggest that higher fines or profits from legal production are more likely to stimulate renewable energy production than subsidies. Our findings enrich our knowledge of the link between government regulations and the promotion of renewable energy.
Highlights
Faced with the challenges of energy shortages and rising greenhouse gas emissions, countries around the world have gradually adopted various policies to stimulate the use of environmentally friendly renewable energy, among which subsidies and penalties are the main intervention means
Policy makers want an efficient regulation method to achieve the objective of biodiesel production instead of inferior cooking oil production in the infinitely repeated game
Our simulation code is written in MATLAB. It begins with drawing net profits for the processor producing biodiesel and inferior cooking oil based on the current situation in Shanghai, China
Summary
Faced with the challenges of energy shortages and rising greenhouse gas emissions, countries around the world have gradually adopted various policies to stimulate the use of environmentally friendly renewable energy, among which subsidies and penalties are the main intervention means (al Irsyad et al, 2017; Saghir et al, 2019; Chen et al, 2021). When two measures used on the case of spot checks performed first with penalty or subsidy, the processor has lower incentive to produce inferior cooking oil because of large penalties (E2 > K + Cg) and huge social cost of the reuse of waste oils by consumers(V− > E1 + Cg), and higher incentive to produce biodiesel because of increasing penalties and subsidies (E1 + E2 > M). A larger difference in the profits of the two products increases the probability of the processor producing inferior cooking oil illegally, which results in a higher probability of the government performing a spot check This result is similar to the results when the subsidy is given before the spot check is performed. The sooner production of illegal inferior cooking oil is observed, the lower penalty required to induce the processor to produce biodiesel in infinitely repeated game
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