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Subsidies for the Production of Cleaner Energy: When Do They Cause Emissions to Rise?

Listed author(s):
  • Hutchinson Emma

    ()

    (University of Victoria)

  • Kennedy Peter W

    ()

    (University of Victoria)

  • Martinez Cristina

    ()

    (University of Victoria)

We show that a production subsidy to low-carbon energy can have a perverse effect on emissions. The subsidy causes a shift in the composition of production towards the cleaner energy, but it also causes an offsetting consumption effect: energy consumption rises because the subsidy causes the equilibrium price of energy to fall. The net effect on emissions can be positive if the low-carbon energy is not significantly cleaner than the high-carbon energy it displaces. We derive a necessary and sufficient condition for this perverse effect in the context of a competitive energy market. We calibrate an example for an ethanol subsidy in the U.S. and find that this policy is likely to cause an increase in carbon emissions for most plausible parameter values.

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Article provided by De Gruyter in its journal The B.E. Journal of Economic Analysis & Policy.

Volume (Year): 10 (2010)
Issue (Month): 1 (April)
Pages: 1-11

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Handle: RePEc:bpj:bejeap:v:10:y:2010:i:1:n:28
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  1. Gilbert E. Metcalf, 2006. "Federal Tax Policy Towards Energy," Discussion Papers Series, Department of Economics, Tufts University 0612, Department of Economics, Tufts University.
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  5. Sterner, Thomas, 2007. "Fuel taxes: An important instrument for climate policy," Energy Policy, Elsevier, vol. 35(6), pages 3194-3202, June.
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  7. Reyer Gerlagh & Bob van der Zwaan, 2006. "Options and Instruments for a Deep Cut in CO2 Emissions: Carbon Dioxide Capture or Renewables, Taxes or Subsidies?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 25-48.
  8. Fischer, Carolyn & Newell, Richard, 2004. "Environmental and Technology Policies for Climate Mitigation," Discussion Papers dp-04-05, Resources For the Future.
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