The Macroeconomics of Clean Energy Subsidies

Gregory Casey, Woongchan Jeon () and Christian Traeger ()
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Woongchan Jeon: Department of Management, Technology, and Economics, ETH Zurich
Christian Traeger: Department of Economics, University of Oslo; ifo Institute for Economic Research

No 23/387, CER-ETH Economics working paper series from CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich

Abstract: We study clean energy subsidies in a quantitative climate-economy model. Clean energy 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)
Pages: 49 pages
Date: 2023-12
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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:eth:wpswif:23-387

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