Journal of Cleaner Production 139 (2016) 677e684

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Journal of Cleaner Production

journal homepage: www.elsevier.com/locate/jclepro

Subsidies in carbon nance for promoting renewable energy

development
Pu-yan Nie a, You-hua Chen b, *, Yong-cong Yang c, X. Henry Wang d
a
Guangdong University of Finance & Economics, Guangzhou 510320, PR China
b
College of Economics & Management and Guangdong Center for Rural Economic Studies, South China Agricultural University, Guangzhou 510642, PR
China
c
Guangdong University of Foreign Studies, Guangzhou 510006, PR China
d
Department of Economics, University of Missouri, Columbia, MO 65211, USA

a r t i c l e i n f o a b s t r a c t

Article history: Faced with decreasing exhaustible nonrenewable resources and climate change resulting from the use of
Received 19 May 2016 fossil energy, it is urgent to accelerate the development of renewable energy. But the development of
Received in revised form renewable energy requires abundant nancial support both from banks and governments. This article
12 August 2016
considers bank loans to develop renewable energy and highlights the effects of government subsidies. By
Accepted 17 August 2016
Available online 20 August 2016
using a microeconomic model and taking all stakeholders including the government, banks and share-
holders of the rm into consideration, this study nds that government subsidies raise outputs and debt
levels of renewable energy rms and improve shareholder value as well. More importantly, nancial
Keywords:
Renewable energy
debts stimulate rms' outputs but decrease the net prot per unit of debt due to the limited liability
Limited liability effects effects. Finally, subsidy policy plays a critical role in renewable energy development because environ-
Subsidy mental efciencies of subsidies decrease with the subsidy degree. Other valuable conclusions would be
Debt achieved if principal-agent problem and other corporate governance factors are employed.
2016 Elsevier Ltd. All rights reserved.

1. Introduction that governmental policies and nancial environments are major

Both economic development and residential life depend heavily
on energy. Moreover, the consumption of fossil energy produces
by-products which are harmful to health and the natural environ-
ment. The energy crisis of the 1970s attracted attention to both
energy shortage and climate change caused by increasing energy
consumption (Nie and Chen, 2016), while talk about climate change
started strongly from the Kyoto Protocol signed in 1997. To reduce
emission and to cope with climate change, developing renewable
energy has become a good means to counteract climate change
caused by fossil energy consumption.
At the same time, the economic environment has signicant
effects on investments in renewable energy. For example, in-
vestments in renewable energy in the U.S, Europe and India were
reduced sharply during the drop in oil price from 2013 to 2015.
Contrarily, during the same period, investments in renewable en-
ergy were still increased in developing countries. This study shows
* Corresponding author.
E-mail address: chenyhua214@163.com (Y.-h. Chen).
factors to account for those differences. The above facts motivate us
to explain the different inuences of the uncertain demand envi-
ronment, nance condition and government subsidies to the in-
vestment of renewable energy all over the world.
By taking governmental subsidies and limited liability effects of
debt into account, this article shows that subsidies stimulate the
development of renewable energy. Moreover, governmental sub-
sidies improve the outputs of renewable energy, debt levels and
shareholder value. Under the assumption that the aim of rm
managers is highly consistent with shareholder value, this study
nds that debt stimulates renewable energy outputs by increasing
rms' prots under good economic conditions. Environmental ef-
ciencies of subsidies decrease with increased subsidies. Our con-
clusions are helpful for policy making in renewable energy
development and in combating global climate change.
Different from most existing studies, this paper employs
corporate nance theory to study renewable energy development.
Limited liability effects are a major element in corporate nance,
which means rms with high debt have more incentives to pursue
aggressive output strategies because that increases returns in good
states but has limited cost in bad states due to limited liability. The

http://dx.doi.org/10.1016/j.jclepro.2016.08.083
0959-6526/ 2016 Elsevier Ltd. All rights reserved.
678 P.-y. Nie et al. / Journal of Cleaner Production 139 (2016) 677e684
main contributions of this article lie in the following three aspects.
Firstly, limited liability effects encourage entrepreneurs to
develop high risk projects such as aggressive renewable energy
investment for the high returns in good states. But on the other
hand, limited liability effects also deter rm's chance to renew their
loan. Based on this contradiction, this paper introduces limited li-
ability effects into renewable energy eld and aim to capture im-
pacts of limited liability effects on the development of renewable
energy industries.
Secondly, this article successfully explains the different devel-
opment patterns of renewable energy in different regions of the
world. Taking governmental subsidies into account, we show that
subsidies yield different outcomes for renewable energy develop-
ment all over the world.
Finally, the economic model in this article seems more reason-
able than existing ones because this article considers a more rele-
vant aspect of the rm, limited liability, and how such rms
develop renewable energy under governmental subsidies. There-
fore, conclusions in this article seem more reasonable to cope with
the environmental problems in reality. The achieved conclusions in
this article can therefore support robust decisions for the
government.
The rest of this paper is organized as follows: The literature
review is provided in Section 2. The model and research method are
presented in Section 3. In the model, the limited liability is intro-
duced to discuss carbon nance. Section 4 analyzes the model and
basic conclusions are achieved. Moreover, the efciency of sub-
sidies is addressed. Conclusions are remarked in the nal section.
2. Literature review
Renewable energy is getting more and more attentions for the
climate change (Chen et al., 2016a; Nie, et al., 2016; Bardi et al.,
2013). Since renewable energy owns the advantages of little
emission, developing renewable energy is a good means to work
against climate change caused by fossil energy consumption
(Antimiani et al., 2013; Sun and Nie, 2015; Klein and Coffey, 2016).
Moreover, Huenteler et al. (2016) studied the impact of local and
global technological learning on the cost of renewable energy in
developing countries. Yang et al. (2016) capture the effects of ur-
banization of China on the consumption of renewable energy. Chen
et al. (2016a) investigated public support for renewable energy in
China by an online survey and their study found that cost and se-
curity are two major factors for renewable energy purchase.
The renewable energy industry is capital-intensive and the
development of renewable energy needs large amount of capital.
Therefore, carbon nance has attracted full academic attention in
recent years (Purdon, 2015; Simon et al., 2012). Campiglio (2016)
remarked about carbon trades and concluded that carbon nance
plays an important role in nancing the transition to a low-carbon
economy. In carbon nance theory, Taylor et al. (2016), Jackson and
Victor (2016) further developed the theory about the effects of
carbon nance on climate change, income distribution, employ-
ment, economic growth, rising inequality and so on. Based on the
endogenous growth model, Acemoglu et al. (2016) established the
theory about the effects of carbon nance on clean technological
innovation. They argued that carbon taxes and researching sub-
sidies may encourage innovation for clean technology, and exam-
ined their conclusions with microdata from the US energy sector.
A few other researches highlighted nancing in renewable en-
ergy investment. For example, Huhtala (2003) outlined promoting
nancing of cleaner production investments. Kameyama et al.
(2016) offered an overview from the past, the present to the
future about the nance for achieving low-carbon development in
Asia. And they issued that nance had become a crucial agenda in
climate change. The recent editorial of the Journal of Energy Policy
also supplied a review about nancing renewable energy in
developing countries of East Asia (Editorial, 2016). All these studies
illustrated the critical role of nance in renewable energy.
Subsidy is another major topic in cleaner energy production,
environment protection and renewable energy industry (Sun and
Nie, 2015; Abadie et al., 2016; Chen et al., 2016b). Nie et al. (2016)
captured different impacts of different output subsidies and rms'
positions on energy efciency. Yang and Zhao (2015) surveyed the
different effects of subsidies on renewable energy equipment pur-
chase in China by classifying Chinese families into high-income
families and low-income ones. Batlle (2011) investigated the cost
of allocating renewable energy source subsidies by using the
Spanish system as an example. More interestingly, Zhang et al.
(2014) highlighted the effect of government subsidies on nancial
performance of renewable energy manufacturing in China. And
their study revealed signicant positive effects of subsidies on the
nancial performance of energy manufacturing companies.
Many other researchers focused their attentions on some special
regions or countries, especially on developing countries for that
those countries are expected much more in climate change control.
For example, Tom
as et al. (2010) and Gomes et al. (2008) paid
special concern on greenhouse gas emissions of Portugueal. Yu and
Lo (2015) highlighted China's carbon nance and addressed the
effects of carbon nance on the carbon market. Lewis (2010)
investigated the effects of carbon nance on the development of
renewable energy in China. Mo et al. (2016) discussed other factors,
including emission trading scheme (ETS) to inuence carbon
nance in China. Recently, Purdon (2015) payed attention to carbon
nance in Africa including Tanzania, Uganda and Moldova. While
Qadir et al. (2013) discussed the development of carbon nance in
Australia and identied the effects of carbon nance. Based on
green entrepreneurship, Silajd zi

c et al. (2015) addressed the carbon
nance in the development of green economics in Bosnia and
Herzegovina. Reynolds (2012) examined the carbon nance plan of
Sub-Saharan Africa. Recently, Soundarrajan and Vivek (2016)
introduced the effects of carbon nance on green growth in India.
It can be concluded that the existing literature has concerned
less about the relationship between the uncertain economic envi-
ronment and the investment of renewable energy. This article aims
to capture the effects of limited liability of rm debt and govern-
mental subsidies on renewable energy development by combining
corporate nancial theory with energy economics theory under
environmental uncertainty.
3. The model
Here the model of a renewable energy rm under a competitive
energy environment is established. To simplify, this paper always
assumes the price of energy to be given by pe 1 g(z), where z is a
random variable which represents the effects of an uncertain
environment on the fortune of the renewable energy rm. The
random variable z is distributed over the interval z; z with the
density function f(z) > 0 for all z2z; z. The real function g(z) in-
dicates the effects of z and the rm's prots depend on the random
variable z. Moreover, dg(z)/dz > 0, which means that better eco-
nomic environment yields higher price for the renewable energy
rm. Many examples exist that capture the effects of random var-
iables, for example, the energy price uctuations of Nie and Yang
(2016) or other uncertainties (Olsson et al., 2016; Nie, 2015).
The usage utility of fossil energy is identical to that of renewable
energy, but emission from fossil energy consumption is much more
than that from renewable energy. Without loss of generality, it is
always assumed that emission of renewable energy consumption is
zero.
 P.-y. Nie et al. / Journal of Cleaner Production 139 (2016) 677e684
3.1. Renewable energy rm
To produce renewable energy, capital and labor inputs are
necessary. Denote capital input by K and labor input by L, the
production function is
Y REK; L K a Lb ; (1)
where 0 < b < a < 1, a b < 1 and the function RE(K,L) is concave in
K and L. Function (1) is the Cobb-Douglas production function,
which is very popular in the economics literature (Chen et al.,
2016c). Actually, this study further assumes that a > b for renew-
able energy production, which means the production of renewable
energy is capital-intensive. According to Campiglio (2016), the
capital of renewable energy rms covers about 80%e90% of total
inputs. Capital input K includes two parts: one is the capital owned
by the rm K0, the other is the debt D loaned from outside debtors
such as banks, where D  0 and K K0 D. The price of labor is
denoted by u and the marginal cost for unit capital is r. The prots
of rms are
pRE L; K; z 1 gzREK; L  uL  rK SK; (2) sequentially. The following analyses of the model will be structured
where S(K) tK (r > t > 0) are subsidies from the government to
encourage renewable energy production, which depend on capital
inputs. About subsidies for renewable energy, many types of sub-
sidies exist in reality (Yang and Nie, 2015, 2016; Sun and Nie, 2015),
but this article only focuses on output subsidies like in Yang and Nie
(2015, 2016).
In equation (2), the rst term is the revenues, the second is costs
incurred by labor inputs, the third is costs by loan (or the capital
inputs) and the nal term represents subsidies from the
government.
3.2. Shareholder value
For the shareholders, given the predetermined debt level D, the
value that goes to the shareholders after debt payment and pro-
duction decision is the residual claim equity value, which is rep-
resented by V. Limited liability effects are similar to those in
Brander and Lewis (1986) or Chen et al. (2015). We therefore have
Zz
VL; K pRE L; K; z  Df zdz; (3)
bz
where b
z is determined by
pRE L; K; bz  D 0: (4)
Function (3) comes from limited liability effects of debt. When
the prots of renewable energy are lower than the debt, the rm
will be forced to go bankrupt and liquidate. Otherwise, this rm is
able to pay the debt or in better status.
For equation (4), it further notes that z < b
z < z, which is similar to
that of Brander and Lewis (1986) and Chen et al. (2015). When
zb z , the renewable energy rm's operating prots can only cover
its debt obligations. For the worst status z < b z , the rm's earnings
are not enough to cover its debt obligations and will go bankrupt
and that is out of our study. z > bz indicates positive prots for this
rm. Moreover, it is assumed that the decision of the rm is
consistent with the shareholder value, which means there is no
principal-agent problem.
Let d V/D denote the net prot per unit of debt (Chen et al.,
2015). The environmental efciency of subsidies is denoted as
679
RE/S(K), which represents the unit reduction of emission with
the subsidy S(K).
In order to make the logic of this study more specic, the model
input-output follow charts are outlined as following Fig. 1.
The timing of the game is as the following: In the rst stage, the
government declares the green nance policy (Both the ways and
the degree to subsidize renewable energy rms are disclaimed in
the public). In the second stage, an entrepreneur (or a rm) applies
loans from banks and declares to develop renewable energy. In the
third stage, banks determine or reject to lend money to this rm. In
the fourth stage, if the loans are permitted, this rm develops
renewable energy and chooses its outputs.
4. Results and discussions
Functions (2) and (3) will be analyzed by backward induction,
which means this study will capture the optimal outputs of the
renewable energy rm rst, then banks' loan decision in the third
stage, followed by the rm's entry decision and government
renewable energy subsidy policy in the second and rst stages,
based on the four stakeholders lining in the four different stages.
4.1. Renewable energy rm
In the last or the fourth stage, given the uncertain economic
environment z and the loan level D, the renewable energy rm
maximizes its prots given by equation (2). Equation (2) will be
discussed in two cases. One is with nonbinding capital constraints
which mean the renewable energy rm can loan enough debt for its
production. The other is that the capital constraints are binding. In
this situation, the rm's capital, including its own capital and debt,
is less than its optimal need.
4.1.1. Case 1: nonbinding capital constraints
With nonbinding capital constraints or D  K  K0, the rm has
enough loans or more debt than its need. But more debts result in
more interest costs, so D > K  K0 is not optimal for the rm if there
is no other investment opportunities except for renewable energy
production. So, this paper only considers D K  K0 in the case of
nonbinding capital constraints. Apparently, for nonbinding capital
constraints, equation (2) is concave and the solutions uniquely
exist, which are determined by the following rst-order optimal
conditions.
vpRE L; K; z vREK; L
1 gz  u b1 gzK a Lb1  u
vL vL
0;
(5)
vpRE L; K; z vREK; L dSK
1 gz r
vK vK dK
a1 gzK a1 Lb  r t 0: (6)
Denote the rm's optimal labor and capital inputs by L(D,z) and
K(D,z), respectively. By direct calculations, this study has the rela-
LD;z
tionship KD;z ab rt
u . Moreover, this study has the optimal capital
and labor inputs given by
  1b a1b1
u br  t
K *;u D; z ; (7)
b1 gz au
680 P.-y. Nie et al. / Journal of Cleaner Production 139 (2016) 677e684

Fig. 1. Model input-output ow charts.

  ab  aab1
u ab1 br  t
p*;u
1
  1  aab1 RE D; z 1  a  b1 gz
1ab :
u ab1 br  t b au
L*;u D; z : (8)
b1 gz au (10)
The rm's output is therefore given by The optimal debt level is

  1b  1
u br  t ab1
  ab   a D*;u z KD; z  K0  K0 :
u ab1 br  t ab1 b1 gz au
RE*;u D; z ; (9)
b1 gz au (11)
The corresponding maximum prots are given by
 P.-y. Nie et al. / Journal of Cleaner Production 139 (2016) 677e684 681

4.1.2. Case 2: binding capital constraints of binding capital constraints, the governmental subsidies have no
  1b a1b1 effects on outputs.
u brt
If D K0 < b1gz au , the capital constraints are
  1b a1b1 4.2. Banks
u brt
binding. (The situation Dz K0 > b1gz au implies
In the third stage, according to the value p*;i
RE D; z for i {u,b},
nonbinding capital constraints or the rm borrows too much debt,
banks determine whether to lend money to the renewable rm or
which has been discussed in Case 1. Moreover, under
  1b a1b1 not. Banks' strategies are also discussed in two cases.
u brt
Dz K0 > b1gz au , the production is not ef-
4.2.1. Case 1: nonbinding capital constraints
cient.) In this case, K D K0. Function (2) is rewritten as Under nonbinding capital constraints, or when

pRE L; K; z 1 gzK a Lb  uL  rK SK: (12)   ab  aab1

u ab1 br  t
p*;u
1

RE D; z 1  a  b1 gz  D;
1ab
This function is concave and the prot-maximizing solution b au
uniquely exists, which is determined by the following rst-order (17)
optimal conditions.
banks are willing to lend money to this renewable energy rm.
vpRE L; K; z Otherwise, banks realize the rm does not have the ability to pay
b1 gzK a Lb1  u 0: (13)
vL off its debt and are not willing to lend money to the rm.
It therefore gets the equilibrium labor input from function (12) Under nonbinding capital constraints, combining equations (11)
as the following and (17), it is known that the rm can produce at the optimal level if

    1b a1b1
u
1
u br  t
L *;b
D; z
b1
: (14) D  K0  pRE D; z
b1 gzK0 Da b1 gz au
  ab  aab1
1 u ab1 br  t
Then, the output is given by 1  a  b1 gz1ab ; (18)
b au
  b
u b1 a
RE*;b D; z K0 D1b : (15) or
b1 gz
  1b a1b1
The corresponding prots are u br  t
K0 
b1 gz au
  b
   aab1
u
ab

p*;b
b1 a
u ab1 br  t
RE D; z 1  b K0 D1b  r  tK0 D:
1

b1 gz  1  a  b1 gz1ab : (19)

b au
(16)
This rm can select the optimal inputs under equation (19). The
For the renewable energy rm, this article has the following production of the rm that owns little capital is less than the
conclusions. optimal levels. Under complete information, equation (19) illus-
Proposition 1. (i) For the renewable energy rm, under trates the condition to produce optimally for a renewable energy
nonbinding capital constraints, the optimal debt level is deter- rm. Under equation (19), the debt level has no effects on outputs.
mined by equation (11). Both governmental subsidies and good This study also points out that the debt level inuences the
economic environments stimulate rm's outputs and improve the renewable energy rm's outputs if
debt levels. (ii) Under binding capital constraints, debt stimulates
  1b a1b1
the renewable energy rm's outputs. Good economic environments u br  t
stimulate the rm's outputs, whereas governmental subsidies have K0 <
b1 gz au
no effects on outputs.   ab  aab1
Proof. See the Appendix. - 1 u ab1 br  t
 1  a  b1 gz1ab : (20)
Remarks: This proposition illustrates the effects of govern- b au
mental subsidies and economic environment on the renewable
This corresponds to Case 2 for the renewable energy rm.
energy rm's strategies under nonbinding capital constraints.
Governmental subsidies reduce the marginal costs of capital and
thus yield more capital demand and more outputs. Under good 4.2.2. Case 2: binding capital constraints
Under Case 2, banks lend money to the renewable energy rm if
economic environments, the rm's production is high and it has
enough intention to extend its production by taking more debts but  b
u b1
p*;b
a
ignores the bankruptcy risk of high debts, which improves outputs
RE D; z 1  b b1 gz
K0 D1b  r  tK0 D
and debt levels. And that is the limited liability effects in corporate
nance theory.  D:
Moreover, from equation (11), it is known that the more capital
(21)
owned by the renewable energy rm, the less debt it requires from
banks. A renewable energy rm with enough capital has no Similar conclusions to Case 1 are achieved for Case 2. Therefore,
intention to borrow money because higher debts mean higher this paper has Proposition 2 by summarizing both the Nonbinding
costs. capital constraints case and the Binding capital constraints case
Under binding capital constraints, debt stimulates the renew- above.
able energy rm's outputs. More debt yields more outputs. Because Proposition 2. Both governmental subsidies and good economic
682 P.-y. Nie et al. / Journal of Cleaner Production 139 (2016) 677e684

environments enhance banks' willingness to lend money to the   b

u b1
p*;b
a
renewable energy rm. b
RE D; z 1  b K0 D1b  r  tK0 D
Proof. Similar to Proposition 1, conclusions are immediately b1 gbz 
achieved and so a detailed proof is skipped. - D:
Remarks: Governmental subsidies reduce the marginal prot of
(24)
the renewable energy rm but improve its prot making ability.
Therefore, banks are willing to lend money to the renewable energy Similar to Case 1, governmental subsidies reduce the threshold
rm under governmental subsidies. Similarly, under good eco- value b
z . The shareholder value is
nomic environments, banks are willing to lend money to the
renewable energy rm. Moreover, both governmental subsidies Zz    b
u b1 a
and good economic environments improve the banks' loan amount. V *;b L; K 1  b K0 D1b
This is consistent with the reality. In bad economic environ- b1 gbz 
bz
ments, it is very difcult for the rm to lend money from banks.
Otherwise, it is easy to apply for a loan. For example, it was very 
easy to apply for a housing loan in the U.S in 2007.1 r  tK0 D  D f zdz: (25)
In summary, debt has no signicant impacts on outputs if the
rm owns enough capital. For the rm owning very little capital, From the above two cases, it immediately achieves the following
debt stimulates the rm's outputs of renewable energy because of conclusion.
limited liability effects. Proposition 3. Governmental subsidies promote the share-
Actually, for the rm owning more capital, banks are more in- holder value.
clined to lend money to it. On the other hand, it is not necessary for Remarks: More subsidies yield lower threshold value, which
the rm to lend money. This contradiction deters the amount of implies higher shareholder value. In this way, many rms will
loans. develop renewable energy. Therefore, governmental subsidies
stimulate the total outputs of renewable energy and relieve climate
change as well.
4.3. Shareholder value Moreover, low marginal costs of capital have the same effects as
governmental subsidies. The cut in interest rate is extensively
In the second stage, the shareholder determines whether to applied all over the world to stimulate investment. So the conclu-
develop renewable energy or not. It is also considered in two sions are also consistent with the reality.
situations.

4.4. Governmental subsidies

4.3.1. Case 1: nonbinding capital constraints
Firstly, this paper considers the threshold value in equation (4)
In the rst stage, based on the rm's prots, debt and share-
and the following conclusions are held.
holder value, the government determines a subsidy policy. For the
  ab  aab1 government, higher subsidies mean more public costs. Further-
u ab1 br  t
p*;u
1
b b 1ab
RE D; z 1  a  b1 g z  D: more, excessive subsidies stimulate the outputs of renewable en-
b au ergy and yield excess capacity, but low subsidies cannot promote
(22) the development of renewable energy efciently. Besides, marginal
effects of subsidies are decreasing as total subsidies increase (See
Obviously, governmental subsidies reduce the threshold value b z.
Proposition 5 in Section 4). Therefore, adequate subsidies play an
Or, governmental subsidies improve the possibility for the renew-
important role in maintaining a robust and sustainable develop-
able energy rm to pay its debt.
ment of renewable energy and the government should draft a
Then, the shareholder value is considered. By equation (3), it has
suitable subsidy policy. In some countries, subsidies to renewable
Zz (   ab   a energy are intensive, while in some other countries or regions,
1 u ab1 br  t ab1 subsidies are scarce.2 The different preferences of governments
V *;u L; K 1  a  b1 gz1ab
b au cause different development levels of renewable energy.
bz In the following, this study will consider the net prot per unit
) of debt d V/D and the environmental efciency of subsidies
 D f zdz: RE/S(K).

(23)
Based on this equation, since governmental subsidies reduce the 4.5. Net prot per unit of debt
threshold value b z , the expected values of the shareholder are
improved. Here it addresses the effects of debt on rm's prots. This paper
also analyzes it in two cases according to the denition of the net
prot per unit of debt d V/D.
4.3.2. Case 2: binding capital constraints
Considering binding capital constraints, it has the following
2
In recent years, the international oil price plummeted. The new investment in
formulation
renewable energy dropped sharply in 2012 and 2013. Many countries including the
U.S., Europe, India and many others, dropped in investment of renewable energy.
But in China, Middle East & Africa, because of large amounts of subsidy, the new
1
Easy housing loan is also accompanied by high debt risk: https://en.wikipedia. investment of renewable energy keeps increasing. For more details, see: http://fs-
org/wiki/Subprime_mortgage_crisis. unep-centre.org/publications/global-trends-renewable-energy-investment-2015.
 P.-y. Nie et al. / Journal of Cleaner Production 139 (2016) 677e684 683

4.5.1. Case 1: nonbinding capital constraints Similar to Case 1, under binding capital constraints, this study
  1b a1b1 also has the conclusions that higher degree of subsidy results in
u brt
In this case, it has D b1gz au  K0 and lower environmental efciency of the subsidies.
The above analyses are summarized as follows.
V V *;u L;K Proposition 5. Higher degree of subsidies yields lower envi-
d ronmental efciency of the subsidies.
D D
Z z(   ab   a ) Remarks: This conclusion illustrates decreasing environmental
1 u ab1 br  t ab1 efciency of governmental subsidies. Because the production
1 a  b1gz1a  b D f zdz
bz b au function is concave in capital inputs, outputs of renewable energy
:
D decrease with governmental subsidies. Therefore, the properties of
(26) renewable energy production yield decreasing marginal effects of
subsidies.
Equation (26) implies that d is decreasing in D. Namely, under This conclusion is helpful for decision-makers to determine the
nonbinding capital constraints, high debt level decreases the net subsidy policy. The policy implication of this conclusion is that the
prot per unit of debt. government should not provide too high subsidies to renewable
energy rms in order to maintain the efciency of the public fund.
4.5.2. Case 2: binding capital constraints
Considering binding capital constraints, this study has

V V *;b L;K
d 5. Concluding remarks
D D
Z z  b 
u b1 a Brander and Lewis (1986) made a signicant contribution by
1b K0 D1b rtK0 DD f zdz combing corporate nance with industrial organization theory
b b1gbz 
z : with the bridge of limited liability effects. This study expands their
D
(27) theory to carbon nance or renewable energy investment. Several
other papers involve nancing (Kameyama et al., 2016; Editorial,
Similarly, under binding capital constraints, high debt level 2016) or even the banks (Campiglio, 2016), but they only high-
decreases the net prot per unit of debt. lighted the crucial role of nancing on climate change and
The above analysis is summarized as follows. renewable energy development. Kameyama et al. (2016) illustrated
Proposition 4. High debt level decreases the net prot per unit how investment towards low-carbon development could be
of debt. materialized. Campiglio (2016) mainly discussed the potential role
Remarks: A renewable energy rm with high debt level should of monetary policies and macroprudential nancial regulation.
undertake high costs from debt. This causes decreasing net prot None of those studies captured the strategic effects of debt but debt
per unit of debt. Moreover, the concave property of the production effects exist in nearly all modern rms because almost all rms are
yields decreasing net prot per unit of debt. In general, net prot operated with debts. Debts are so crucial because loan capitals can
per unit of debt is decreased (Chen et al., 2015). make an entrepreneur successful and it can also make the rm fail.
So the major novel contribution of this study is that all analyses are
4.6. Environmental efciency of subsidy based on a more realistic rm framework under uncertain eco-
nomic environment and highlights the effects of debt in rm
Here the environmental effects of government subsidy are dis- competition strategy.
cussed. The denition of the environmental efciency of the subsidy This article combines limited liability effects in rm theory with
RE/S(K) is also considered in two cases. the renewable energy industry. It takes all stakeholders, including
the renewable energy rm, shareholder, banks and the government
4.6.1. Case 1: nonbinding capital constraints into account by a four-stage game. This study argues that limited
In this case, based on the denition of the environmental effects liability effects stimulate the renewable rm's outputs and
of government subsidies, it has governmental subsidies promote the development of renewable
energy. Furthermore, the environmental efciency decreases with
  ab  aab1
u
ab1
brt the subsidy degree. The conclusions are helpful for decision-makers
RE RE*;u b1gz au rt to subsidize renewable energy rm. On one hand, it is crucial to
  1b  :
SK tK *;u 1
ab1 t1 gz support subsidies for the development of renewable energy and to
u brt
t b1gz au
cope with global climate change. On the other hand, too high sub-
sidies will reduce the environmental efciency. Those two contrary
(28) effects of governmental subsidies illustrate that the government
Equation (28) can be rewritten as rt
1 .
 1gz r should select adequate subsidy degree to develop renewable energy.
t1gz t1gz
Obviously, without binding capital constraints, higher degree of This article assumes that the aim of managers is highly consistent
subsidies yields lower environmental efciency of the subsidies. with the stockholder value, in other words, there is no principal-
agent problem. In practice, the managers have some special pref-
4.6.2. Case 2: binding capital constraints erences, which have major impacts on rm's strategies. This study
For binding capital constraints, this paper gets the following only captures the effects of demand risk, while many other risks
formulation such as nancial risk due to changing loan interest rate, generation
risk due to maintenance and accidental shutdown, weather risk due
  b to disasters and uctuation of fossil fuel prices also have major
b1
u K0 D1b
a
impact on renewable energy systems. Those are our further
RE RE*;b b1gz
: (29) researching topic. Furthermore, this article highlights the debt to
SK tK *;b tK0 D banks and it is interesting to extend to other nancing measures.
684 P.-y. Nie et al. / Journal of Cleaner Production 139 (2016) 677e684

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