Optimal Policy for Renewable Energy with Externality both in Production and Consumption—The Case of Biomass Energy

Renewable energy has environmental friendliness, but its production process can still cause damage to the environment. This paper examines the best policies of the government while taking environmental pollution of the renewable energy production into consideration. The main conclusions are as follows: firstly, regardless of whether the manufacturer has pollution control technology or not, regardless of the market structure, the optimal tax rate should be equal to the marginal damage of pollution, namely optimal pollution prevention tax is the Pigouvian tax. Secondly, in the fully competitive market structure, the optimal regeneration rate is equal to the marginal revenue energy subsidies for renewable energy, namely the optimal subsidy rate is Pigouvian subsidy;while in the oligopoly market structure, the optimal subsidy rate is higher than that of the renewable energy firms in the completely competition market, and the greater market power the firm has, the higher the optimal subsidy rate should be.