The Macroeconomics of Clean Energy Subsidies

Gregory Casey, Woongchan Jeon, Christian Traeger, Gregory P. Casey and Christian P. Traeger
Authors registered in the RePEc Author Service: Gregory P. Casey

No 10828, CESifo Working Paper Series from CESifo

Abstract: We study clean energy subsidies in a quantitative climate-economy model. Clean en-ergy subsidies decrease carbon emissions if and only if they lower the marginal product of dirty energy. The constrained-efficient subsidy equals the marginal external cost of dirty energy multiplied by the marginal impact of clean energy production on dirty energy production. With standard functional forms, two factors determine the impact of clean subsidies on dirty energy production: the elasticity of substitution between clean and dirty energy and the price elasticity of demand for energy services. At standard parameter values, clean production subsidies increase emissions and decrease welfare relative to laissez faire. With greater substitutability between clean and dirty energy, the subsidies in the Inflation Reduction Act can generate modest emissions reductions. Even in this more optimistic scenario, a clean subsidy generates significantly higher emissions and lower welfare than a tax on dirty energy.

Keywords: climate change mitigation; second-best policies; economic growth (search for similar items in EconPapers)
JEL-codes: H23 O44 Q43 Q54 (search for similar items in EconPapers)
Date: 2023
New Economics Papers: this item is included in nep-ene and nep-env
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Working Paper: The Macroeconomics of Clean Energy Subsidies (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_10828

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