Opinion: How to design clean energy subsidies that work—without wasting money on free riders

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The planet is warming due to increased greenhouse-gas emissions, contributing extreme heat waves And once unimaginable Flooding, Yet despite the risks, countries have policies but not narrow passage To keep global warming under control.

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The problem is not a lack of technology. The International Energy Agency recently released a detailed analysis of Neat,need energy technology To reduce greenhouse-gas emissions globally to net zero by 2050. The IEA says that a rapid energy transition requires significant government support to promote solar and wind power, electric vehicles, heat pumps and many other technologies.

One politically popular tool for providing government assistance is subsidies. US government’s new anti-inflation law is one multibillion-dollar exampleLoaded with financial incentives to encourage people to buy electric vehicles, solar panels and more.

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But how big must clean-energy subsidies for governments be to meet their targets, and for how long do they need to be?

Our research points to three important answers for any government considering clean energy subsidies – and for citizens to track their progress.

Scientists say climate change is causing more extreme weather patterns, but many countries lack systems to provide early warning of potential weather disasters. One UN effort is pushing to improve the data collection that is vital to these systems. WSJ science and climate reporter Eric Naylor joins host Zoe Thomas to discuss.

Why subsidy?

An obvious first question is: why should governments subsidize clean energy?

the most direct answer is Clean energy helps reduce harmful emissionsBoth the gases that cause local pollution and those that warm the planet.

Reducing emissions helps reduce both public-health costs and damages from climate change, which justifies government spending. Reports have speculated that the U.S. spends $820 billion A year on the health costs associated with air pollution and climate change. Globally, the World Health Organization estimated that the cost reached $5.1 trillion In 2018. Taxing and regulating polluting industries can also cut emissions, but the carrot is often more politically popular than the stick.

A less obvious reason for subsidies is that government support can help a new and initially expensive technology become competitive in the market.

Governments have been central to the development of many of the technologies that are widespread today, including microchips, the Internet, solar panels, and GPS. had microchips fantastically expensive When first developed in the 1950s. Demand from the US military and NASA, who could pay the higher price, spurred the growth of the industry, and eventually the cost was reduced enough that they are now found in everything from cars to toasters.

government help It has also helped in reducing the cost of solar power. Rooftop Solar System Cost 64% fell In the US from 2010 to 2020 as cells became more efficient and higher volumes drove prices down.

how much money?

So, subsidies can work, but what is the right amount?

Too little, and the subsidy has no effect. Giving everyone a $1 coupon on an electric car isn’t going to change anyone’s buying plans. But the subsidy can also be set very high.

The government doesn’t need to spend money to persuade consumers who are already planning to buy an electric car and can afford it, yet studies show that clean-energy subsidies are distributed disproportionately. goes from Rich People, When those people who would have bought the commodity still receive the subsidy, they are known as “free riders,

The ideal subsidy would attract new buyers while avoiding free riders and spending more on those who are already convinced. Subsidy can work only if it persuades the previously reluctant consumer to buy the product.

Between 2009 and 2017, subsidies helped solar prices fall by 50% and solar purchases increase 10-fold. Lower costs make a technology more attractive, while a growing solar industry is able to produce panels at a lower cost. Barbos et al., 2021; Solar Market Insight Report / SEIA


How long should the subsidy last?

Timing is also important while considering the size of subsidy. When a promising technology is new and expensive, free riders are not a problem. Larger subsidies may be needed to attract some buyers, create an emerging market, and support industry growth.

Solar power is a good example: In 2005, solar was several times more expensive than conventional power sources. subsidy, like 30% investment tax credit installed that year, helped drive down costs, and is the solar it is today about one-tenth the value And cost competitive with other power sources.

Once a clean technology becomes competitive, subsidies can still play an important role in accelerating the energy transition, but at a lower level than in the past.

In our research On residential solar panels, we estimate that the ideal subsidy for rooftop solar should have initially been higher than actual federal tax credit But falls more quickly, going to zero after 14 years from its start date.

By introducing roughly 20% more subsidies, our models found that this would lead to faster production increases, leading to faster cost reductions and less need for higher future subsidies.

Should subsidies eventually disappear?

Subsidies disappear completely once the technology is sufficiently cost-competitive. However, even if a technology is competitive, it may be worth further subsidies if the speed of adoption is important.

The rationale for continuing a subsidy depends on whether the additional adoption it encourages is cost-effective in reducing emissions. Wind power is cheaper than fossil fuel power in many parts of the country. Even then, we found it that continuing subsidies for wind power would yield valuable emissions benefits.

That said, sometimes subsidies persist when they shouldn’t.

Despite harm to human health, the environment and the climate, fossil fuels have been heavily subsidized for decades, increasing public costs. governments spent globally about $700 billion on fossil-fuel subsidies in 2021. The US government has spent more on renewable-energy tax credits than it has in recent years. Fossil fuels, a promising replacement for government subsidies,

global impact

while America was Focus of our solar subsidy researchThis type of thinking—balancing the costs and benefits of subsidies—can be applied in other countries to better design subsidies for clean-energy technologies.

Subsidies are only one policy tool, but they are important for both incentivizing early-stage technologies and accelerating the deployment of more competitive alternatives. As the world attempts the fastest energy transition in history, today’s energy subsidy decisions will affect its ability to succeed.

Eric Hittinger Associate Professor of Public Policy at Rochester Institute of Technology. Eric Williams Professor of Sustainability at the Rochester Institute of Technology. qing miao is associate professor of public policy at the Rochester Institute of Technology. Tiruvark b. tibebu A Ph.D. student at Rochester Institute of Technology.

This comment was originally published by The ConversationHow to design clean energy subsidies that work – without wasting money on free riders

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Credit: www.marketwatch.com /

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