27 Sep 2012

Are subsidies more efficient than price signals?

Alex Trembath of the Breakthrough Institute sent this last week:
The lure of a carbon tax coming from several corners of Washington may be tempting, and the poor optics surrounding clean tech subsidies might make their forced expiry an attractive sweetener for lawmakers hoping to pass a carbon tax through Congress. But if advocates hope to sustain the remarkable progress the United States has made in deploying zero-carbon energy technologies in recent years, they should think twice before trading today's clean tech deployment subsidies for a carbon tax.

I recently co-authored a Breakthrough Institute analysis that found direct subsidies offer a stronger incentive for zero-carbon energy deployment than would a carbon tax alone. The methodology we used is simple: by multiplying the value of the subsidies for clean tech by the CO₂ emissions factor of competing fossil energy sources, we calculated the "implicit carbon price" of today's subsidies. And we found that subsidies like wind energy's production tax credit (PTC) and solar energy's investment tax credit (ITC) reliably offer higher implicit carbon prices than would current proposals for a carbon tax. For instance, while Rep. Jim McDermott (D-WA) recently proposed a carbon tax of $15/ton CO₂, the PTC imposes an implicit carbon price signal of $55/ton CO₂ when wind is competing against natural gas.
In other words, Alex and is colleagues are saying that a targeted subsidy for wind or solar will produce more wind or solar than a carbon tax. That makes sense, but it's not necessarily more efficient than a carbon tax, since a carbon tax -- in addition to encouraging the development of wind and solar technologies -- will ALSO:
  • Encourage people to use carbon-rich fuels more efficiently (techniques).
  • Encourage innovations that get more energy from carbon-rich fuels (technology)
  • Encourage innovations in non-wind and non-solar sources of energy
  • Raise revenue that can be used to reduce other taxes -- as in British Columbia
  • Provide a clear price signal in proportion to the carbon content of ALL energy sources
I think that those effects are pretty useful, but Alex appears to think that governments are better at choosing who and what to subsidize. I've seen many mistakes in that area (e.g., negative prices for wind power), so I do not share his faith.

We're going to debate these ideas -- and more -- next Tuesday (9am Pacific), so join us to hear his points, ask your questions and learn a little more about how ideas translate into policies.
Ed Dolan makes these points with characteristic clarity.