Strategic technology policy as a supplement to renewable energy standards

In many regions, renewable energy targets are a primary decarbonization policy. Most of the same jurisdictions also subsidize the manufacturing and/or deployment of renewable energy technologies, some being sufficiently aggressive as to engender WTO disputes. We consider a downstream energy-using product produced competitively but not traded across regions, such as electricity or transportation. A renewable energy technology is available, provided by a limited set of upstream suppliers who exercise market power. With multiple market failures (emissions externality and imperfect competition), renewable market share mandates as the binding climate policy, and international trade in equipment, the stage is set to examine rationales for green industrial policy. Subsidies may be provided downstream to energy suppliers and/or upstream to technology suppliers; each has tradeoffs. Subsidies can offset underprovision of the renewable alternative by the upstream suppliers, but they allow dirty generation to expand as the portfolio standard becomes less costly to fulfill. Downstream subsidies raise all upstream profits and crowd out foreign emissions. Upstream subsidies increase domestic upstream market share but expand emissions globally. In our two-region model, strategic subsidies chosen noncooperatively can be optimal from a global perspective, if both regions value emissions at the global cost of carbon. But if the regions sufficiently undervalue global emissions, restricting the use of upstream subsidies can enhance welfare.