The planet is warming as greenhouse gas emissions increase, contributing to extreme heat waves and floods that were once unimaginable. Despite the risks, national policies are no longer in place to control global warming.
The problem is not a lack of technology. The International Energy Agency recently released a detailed analysis of the clean energy technologies needed to reduce greenhouse gas emissions to zero globally by 2050. What is needed, the IEA says, is significant government support to promote solar and wind power, electric vehicles, heat pumps and a variety of other rapid energy transition technologies.
Another politically popular tool for providing government support is subsidies. The US government’s new Affordable Care Act is a multibillion-dollar model, full of financial incentives to encourage people to buy electric vehicles, solar panels and more.
But how big should governments finance clean energy to meet their goals, and how long does it take?
Our research points to three important answers for any government considering clean energy funding—and for citizens monitoring their progress.
Why support at all?
The first obvious question is: Why should governments subsidize clean energy at all?
The most straightforward answer is that clean energy helps reduce emissions—both greenhouse gases and greenhouse gases.
Reducing emissions helps lower both public health costs and the damage caused by climate change, which justifies government spending. Reports have estimated that the US spends 820 billion dollars annually in health costs related to air pollution and climate change. Worldwide, the World Health Organization estimated the cost to reach $5.1 billion in 2018. Taxing and regulating polluting industries can reduce emissions, but carrots are often more politically popular than sticks.
An implicit rationale for funding is that government support can help new and expensive technologies compete in the marketplace.
Governments have been central to the development of many technologies that are common today, including microchips, the internet, solar panels and GPS. Microchips were very expensive when they were first invented in the 1950s. Demand from the US military and NASA, which could pay a higher price, fueled the industry’s growth, and the cost eventually dropped enough to be found in everything from cars to toasters.
Government support has also helped to lower the cost of solar power. Rooftop solar system costs fell 64% from 2010 to 2020 in the US as cells became more efficient and higher volumes lowered prices.
How much money?
So, benefits can work, but what is the right amount?
It is too low, and the funding is ineffective. Giving everyone a $1 off electric car coupon isn’t going to change anyone’s purchasing plans. But subsidies can be set very high.
The government doesn’t need to spend money persuading consumers who are already planning to buy an electric car and can afford it, yet studies show that clean energy subsidies don’t resonate with wealthy people. When prospective buyers receive subsidies, they are known as “free riders.”
The right financing attracts new customers while avoiding free riders and overspending already convinced people. Subsidy can only work if it convinces a previously disinterested customer to buy a product.
How long should the funding last?
Timing is also important when considering the amount of funding. When a promising technology is new and expensive, free riders are out of trouble. Substantial financing may be needed to attract new customers, build emerging markets, and support business growth.
Solar energy is a good example: In 2005, solar energy was many times more expensive than traditional sources of electricity. Subsidies, such as the 30% Investment Tax Credit established that year, helped lower prices, and today’s solar is about one-tenth the price and cost-competitive with other sources of electricity.
Once clean technology is competitive, subsidies may play an important role in accelerating the energy transition, but at a lower level than before.
In our research on residential solar panels, we estimate that the eligible subsidy for rooftop solar should have been higher at the beginning than the actual federal tax credit but declined rapidly, dropping to zero after 14 years from its inception date.
By starting the subsidy at about 20% higher, our models found that they will increase production faster, which will reduce costs faster and reduce the need for higher subsidies in the future.
Should subsidies end eventually?
It makes sense that subsidies should disappear entirely once the technology is sufficiently cost-competitive. However, even if the technology is competitive, it may be worth more funding if the speed of adoption is important.
The argument for continued funding depends on whether the additional adoption it stimulates is cost-effective in reducing emissions. Wind energy is cheaper than fossil energy in many parts of the country. However, we have found that continued wind energy subsidies will lead to valuable emissions relief.
That said, sometimes the benefits do come around when they shouldn’t.
Fossil fuels have been heavily subsidized for decades, despite harming human health, the environment and the climate, all of which raise the cost to society. Governments around the world will spend nearly $700 billion on fossil-fuel subsidies by 2021. The US government, in recent years, has spent more on renewable energy tax credits than on fossil fuels, which is a promising alternative to government subsidies.
While the US was the focus of our solar subsidy research, this way of thinking—weighing the costs and benefits of subsidies—can be used in other nations to design better incentives for clean energy technologies.
Funding is just one policy tool, but it is important for both stimulating early-stage technologies and accelerating the deployment of more competitive options. As the world attempts the most rapid energy transition in history, today’s financing decisions will affect its ability to succeed.
Eric Hittinger is an associate professor of public policy at the Rochester Institute of Technology. Eric Williams is a professor of sustainability at the Rochester Institute of Technology. Qing Miao is an associate professor of public policy at the Rochester Institute of Technology. Tiruwork B. Tibebu is a Ph.D. student at Rochester Institute of Technology.
This commentary was originally published by The Conversation – How to design clean energy infrastructure that works – without spending money on free riders.
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