Optimal Subsidies for Residential Solar

We study the optimal design of spatially-differentiated subsidies for residential solar panels. We build a structural model of solar panel demand and electricity production across the US 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 a 6-11% increase in the environmental benefits of residential solar panels. National funding for subsidies under the current system exceeds the unconstrained optimum by over ten-fold.