Optimal Tax Incentive Policy Design for Promoting Emerging Energy Technologies: A Stackelberg Game Approach

Tax policy makers usually promote emerging renew-able energy technologies via tax incentives. This work considers a tax policy maker interested in tax incentive policy design to encourage companies to invest in emerging energy technologies. Thus, a single-leader multiple-follower Stackelberg game is proposed. The tax policy maker (government), acting as the Stackelberg leader, is aimed to maximize investments in emerging technologies by enacting attractive tax rates; whereas Stackelberg followers (players or companies), are willing to invest in emerging technologies to maximize net present values by strategically managing the capacity level and the use of incentives. To handle this, a progressive tax deduction is considered. Players’ best responses in terms of tax rates are analytically derived. The analyses have allowed to identify optimal tax policy designs that guarantee maximum benefit for the policy maker while satisfying the financial constraints of each player. Finally, we concluded that the proposed model can be employed as a useful starting point for designing more sophisticated and realistic computational models to support the tax policy design of emerging energy technologies.