Like it or not, the world is going to fall far short of meeting its current goals for reducing carbon emissions. Given that reality, which policies that green energy advocates typically favor — carbon taxes, emissions standards, solar subsidies, tax credits for electric vehicles, and so on — are most effective and should be prioritized?
We economists have tools designed to address such questions. For all of its limitations, economics remains useful for comparing one set of expenditures to another, especially when there is a fixed goal, in this case limiting harmful climate change.
A recent study finds that, of all domestic subsidies, the most effective involve replacing the dirty production of electricity with the cleaner production of electricity. In practice, that means subsidies or tax credits for solar and wind power. Those are more than twice as effective as appliance rebates, the weatherization of homes, or subsidies for buying electric or hybrid vehicles.
Current local and national policies offer subsidies for both electric vehicles and for solar and wind power, though the specifics vary. It would be better if the US switched more of those funds into subsidies for solar and wind power.
Green energy advocates, however, tend to support public subsidies for any policy that reduces emissions. “Less money for electric vehicles” is not the kind of message they necessarily want to send. Nonetheless, in a world of scarcity and limited support for green energy projects, hard thinking about trade-offs is necessary.
When it comes to green energy policies, many countries are having trouble meeting their commitments. Australia, for instance, repealed its carbon tax a decade ago, and many nations are talking about a zero-emissions future in vaguer terms and with looser deadlines. The UK has a net zero pledge for 2050, but is not on track to meet intermediate targets. It’s folly to blindly support an all-of-the-above strategy.
So we need to choose, and this paper offers guidelines. There are many debates in energy policy over what is exactly the social cost of carbon emissions. But these results are relative, comparing one policy to the next, and they do not require any particular answer for carbon costs.
Another result is more speculative, due to data limitations, but intriguing: The US may get more bang for its buck supporting green energy policies elsewhere. If the US were to subsidize a move away from charcoal-burning stoves in Kenya, that may yield very high relative returns, higher than any domestic policy. Those returns climb even higher if the welfare of Kenyans and people of other countries is taken into account. Related results show high effectiveness for subsidies to limit the burning of rice fields, which generates carbon emissions.
That said, foreign aid of any kind is usually politically unpopular, even if it benefits Americans. Politicians thus may face trade-offs between effectiveness and popularity.
Domestic subsidies can also prove effective, according to this study — mainly through the experience they enable. That is, as a company or industry employs a new energy technology, over time it becomes better at it, and it becomes much cheaper. Entrepreneurs have incentives to produce cheaper versions to sell to the now-larger market, and this growth in market size in turn produces incentives to innovate yet again. This assumption, which so far has proved realistic, helps to make solar subsidies especially potent.
Nudges to consume less energy are another policy alternative, and often they have the advantage of low initial cost. They are valuable when consumers are connected to a relatively dirty electricity grid, but less so as energy sources become greener.
At the very least, this study gives some implicit direction to green energy advocates. It can be reduced to two pieces of practical advice:
- Put most of your efforts into promoting solar power.
- Do not prioritize the push for electric vehicles.
Coordinated international efforts remain a riskier bet, but with potentially larger payoffs. Perhaps some developing nation will invest the resources to demonstrate it would make good use of green energy subsidies. Green energy is not typically a priority for the poorest nations, nor should it be, but this may be one way to capture some extra foreign aid dollars, to the benefit of all parties.
In the campaign to reduce carbon emissions, it is easy enough to talk about progress. Still, in climate policy as in other areas, the basic logic of trade-offs remains difficult to escape.
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