Green Subsidies
Lecture 1
Subsidies vs Taxes
- The economist’s prescription for reducing emissions is to tax carbon. But this is politically difficult. Instead, many governments have chosen to subsidize renewable energy.
- How do these subsidies work? How do they compare to taxes? Know the key differences.
- The economist’s prescription for reducing emissions is to tax carbon. But this is politically difficult. Instead, many governments have chosen to subsidize renewable energy.
- We went through a simple graphical model to illustrate that a “green subsidy” (where you subsidize a green good but don’t tax a dirty good) can never be as efficient as a carbon tax.
- Know how to draw the graph and explain why the subsidy is less efficient.
Pre-class
- Read “Carbon Taxes or Green Energy Subsidies” by Timothy Taylor.
- Skim quickly this summary of the provisions of the Inflation Reduction Act. I mainly want you to see how many different subsidies there are.
Post-class
- In class we worked through a graphical comparison of the efficiency of taxes and subsidies. Be sure that you can draw both graphs and talk through the intuition for the changes.
- Does the quantity of green energy supplied change when dirty energy is taxed? Why?
- Does the quantity of dirty energy change when green energy is subsidized? Why?
- In the graphs, the quantity of green energy after the tax and subsidy, q’R, was selected to be the same in both cases. I then asserted that the total amount of dirty energy, q’D would have to be lower in the tax case. Why is that? Can you show this algebraically?
Lecture 2
Subsidy targeting
Pre-class
- Read this blog post from Jim Sallee on green subsidies (ignore the part about Trump’s second term at the end).
- Read this blog post by Meredith Fowlie on “Subsidizing renewables for the damage not done”.
- Watch this short video on where we should build renewables.
- Optional: See this description for one company’s attempt to calculate “marginal emission rates”.
- Read the introduction (section 1) of Aldy, Gerarden and Sweeney on investment vs production subsidies.
Post-class
Targeting subsidies in the wholesale electricity market
Consider a market with the following technologies (from first module):
| Fuel | Capacity (MW) | MC | CO2 / MWh |
|---|---|---|---|
| Nuclear | 20 | 10 | 0 |
| Coal | 50 | 35 | .5 |
| Gas | 40 | 55 | .25 |
| Oil | 15 | 90 | .6 |
And demand periods:
- Off-peak demand 60
- Peak demand = 120
Questions
- What are the average emissions in each period?
- What are the marginal emissions in each period?
- If we added 10 MW of solar to the peak period, how much would emissions decline?
- If we added 10 MW of wind to the off-peak period, how much would emissions decline?