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

Author

Listed:
  • Hutchinson Emma

    (University of Victoria)

  • Kennedy Peter W

    (University of Victoria)

  • Martinez Cristina

    (University of Victoria)

Abstract

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.

Suggested Citation

  • Hutchinson Emma & Kennedy Peter W & Martinez Cristina, 2010. "Subsidies for the Production of Cleaner Energy: When Do They Cause Emissions to Rise?," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 10(1), pages 1-11, April.
    • Handle: RePEc:bpj:bejeap:v:10:y:2010:i:1:n:28
    DOI: 10.2202/1935-1682.2506
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    References listed on IDEAS

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    4. Karen Maguire, 2013. "U.S. Energy Subsidies:Do They Reduce Electricity Generated CO2 Emissions?," Economics Working Paper Series 1402, Oklahoma State University, Department of Economics and Legal Studies in Business, revised Jul 2013.
    5. Morris, Adele C. & Nivola, Pietro S. & Schultze, Charles L., 2012. "Clean energy: Revisiting the challenges of industrial policy," Energy Economics, Elsevier, vol. 34(S1), pages 34-42.
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    8. Peter Cramton & Steven Stoft, 2010. "International Climate Games: From Caps to Cooperation," Papers of Peter Cramton 10icg, University of Maryland, Department of Economics - Peter Cramton, revised 2010.

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