U.S. federal government subsidies for clean energy: Design choices and implications

Subsidies for clean energy deployment have become a major component of U.S. federal energy and climate policy. After a surge in spending under the American Recovery and Reinvestment Act of 2009, they are an even larger component but now face increased scrutiny. Given their lasting presence, how does one design these subsidies to be as cost-effective as possible? Surprisingly, the conceptual framework and empirical evidence available to help policymakers identify which subsidies generate the most “bang for the buck” are limited. To help answer this question, we begin with an overview of the justifications for, and the arguments against, subsidizing clean energy technologies. Next, we briefly describe major subsidies. Finally, we summarize key design choices, suggesting an increased focus on upfront cash payments for physical outcomes such as capacity. This contrasts with the considerable focus on tax credits, loan guarantees, production, and cost-based subsidies which have been more prominent to date.