The Macroeconomics of Clean Energy Subsidies

47 Pages Posted: 15 Dec 2023

Date Written: 2023

Abstract

We study clean energy subsidies in a quantitative climate-economy model. Clean en-ergy subsidies decrease carbon emissions if and only if they lower the marginal product of dirty energy. The constrained-efficient subsidy equals the marginal external cost of dirty energy multiplied by the marginal impact of clean energy production on dirty energy production. With standard functional forms, two factors determine the impact of clean subsidies on dirty energy production: the elasticity of substitution between clean and dirty energy and the price elasticity of demand for energy services. At standard parameter values, clean production subsidies increase emissions and decrease welfare relative to laissez faire. With greater substitutability between clean and dirty energy, the subsidies in the Inflation Reduction Act can generate modest emissions reductions. Even in this more optimistic scenario, a clean subsidy generates significantly higher emissions and lower welfare than a tax on dirty energy.

Keywords: climate change mitigation, second-best policies, economic growth

JEL Classification: H230, O440, Q430, Q540

Suggested Citation

Casey, Gregory and Jeon, Woongchan and Traeger, Christian, The Macroeconomics of Clean Energy Subsidies (2023). CESifo Working Paper No. 10828, Available at SSRN: https://ssrn.com/abstract=4665589 or http://dx.doi.org/10.2139/ssrn.4665589

Gregory Casey (Contact Author)

Williams College ( email )

Williamstown, MA 01267
United States

Woongchan Jeon

ETH Zürich ( email )

Zürichbergstrasse 18
Zurich, 8092
Switzerland
+41446324878 (Phone)

HOME PAGE: http://woongchanjeon.com

Christian Traeger

University of Oslo ( email )

PO Box 6706 St Olavs plass
Oslo, N-0317
Norway

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