Why the ‘Bridge Electricity Price’ Could Lead to a Subsidy Trap and Slow Down Green Investments

34 Pages Posted: 24 Apr 2024

See all articles by Markus Dertwinkel-Kalt

Markus Dertwinkel-Kalt

University of Münster; Max Planck Institute for Research on Collective Goods

Christian Wey

University of Düsseldorf - Düsseldorf Institute for Competition Economics (DICE)

Date Written: April 1, 2024

Abstract

The European Green Deal mandates a green transition of the industry and climate neutrality of the European Union by 2050. Russia's invasion of Ukraine has induced, however, an energy crisis, accompanied by the looming threat of deindustrialization due to soaring energy prices. To address this challenge, politicians deliberate on the implementation of a novel electricity subsidy termed the ``bridge electricity price.'' This subsidy would establish a fixed price for electricity for large-scale industrial companies. We investigate the effects of this subsidy, in particular regarding its incentives for firms to engage in a green transition. While successfully mitigating the threat of deindustrialization, we demonstrate that the implementation of the bridge electricity price has unintended consequences, including: (i) a frustration of firms' investments in the green transition, (ii) the induction of an everlasting subsidy scheme, driven by the fact that the government cannot commit to a definite end of the subsidy, and (iii) opportunistic investments, leading to a ``subsidy trap.'' This trap could result in an increasing number of firms, even those not initially reliant on the subsidy, becoming dependent on it, which ultimately leads to fiscal costs that far exceed initial projections.

Keywords: Energy Crisis, Bridge Electricity Price, Electrification, Green Transformation, Subsidy Trap

JEL Classification: D04, L11, L50

Suggested Citation

Dertwinkel-Kalt, Markus and Wey, Christian, Why the ‘Bridge Electricity Price’ Could Lead to a Subsidy Trap and Slow Down Green Investments (April 1, 2024). Available at SSRN: https://ssrn.com/abstract=4793127 or http://dx.doi.org/10.2139/ssrn.4793127

Markus Dertwinkel-Kalt (Contact Author)

University of Münster ( email )

Universitätsstraße 14-16
Münster, 48143
Germany

Max Planck Institute for Research on Collective Goods ( email )

Kurt-Schumacher-Str. 10
D-53113 Bonn, 53113
Germany

Christian Wey

University of Düsseldorf - Düsseldorf Institute for Competition Economics (DICE) ( email )

Universitaetsstr. 1
Duesseldorf, NRW 40225
Germany
+49-211-81-15009 (Phone)
+49-211-81-15499 (Fax)

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