Working Paper: NBER ID: w15054
Authors: Gilbert E. Metcalf
Abstract: The U.S. tax code provides a number of subsidies for low-carbon technologies. I discuss the difficulties of achieving key policy goals with subsidies as opposed to using taxes to raise the price of pollution-related activities. In particular, subsidies lower the cost of energy (on average) rather than raising it. Thus consumer demand responses work at cross purposes to the goal of reducing emissions (especially as average cost pricing is used for electricity). Second, it is difficult to achieve technology neutrality with subsidies -- here defined as an equal subsidy cost per ton of CO2 avoided. Third, many subsidies are inframarginal. Finally, subsidies often suffer from unintended interactions with other policies.\n\nI conclude with some observations on the use of price-based instruments. In particular I discuss how a carbon tax could be designed to achieve environmental goals of emission caps over a control period.
Keywords: tax policy; low-carbon technologies; subsidies; carbon tax; emissions reduction
JEL Codes: H23; Q48
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Subsidies (H20) | Lower energy costs (Q41) |
| Lower energy costs (Q41) | Increased energy consumption (Q41) |
| Increased energy consumption (Q41) | Higher emissions (F64) |
| Subsidies (H20) | Increased energy consumption (Q41) |
| Subsidies (H20) | Higher emissions (F64) |
| Type of technology (L63) | Cost per ton of CO2 avoided (Q52) |
| Interactions of policies (F68) | Negative effects on emissions reduction (H23) |