Democrats in Congress are working on a spending package that will include generous subsidies for renewable energy technologies. Last month, Dave Roberts wrote a helpful rundown summarizing the Democrats’ climate agenda. Under a House proposal, the existing tax credits for electric cars, solar panels, and wind power would be expanded and extended. Democrats would also add new subsidies for electric bikes, direct capture of carbon from the air, low-carbon jet fuel, clean hydrogen, the high-voltage electric lines needed to move electric power around the country, and more.
This represents a significant shift in strategy for the Democrats. The last time the party controlled the White House and both houses of Congress, from 2009 to 2010, they tried and failed to enact an emissions trading scheme that would have created a market price for carbon emissions.
This approach has long enjoyed broad support among economists. Carbon emissions cause harms that aren’t reflected in the prices we pay for goods and services. Setting a price on carbon—either through an explicit carbon tax or with a cap-and-trade system—makes carbon-intensive products relatively more expensive. That gives businesses an incentive to make their products less carbon-intensive and consumers an incentive to switch to lower-carbon products.
Unfortunately, the politics of this approach are grim. Voters hate taxes. They don’t make an exception for carbon taxes, and it’s easy to persuade them that a cap-and-trade system is a carbon tax in disguise. While some polls indicate public support for carbon taxes in the abstract, this is notoriously sensitive to framing; passing a carbon tax in the real world, after opponents have time to make contrary arguments, is extremely difficult.
Voters in Washington state were asked to vote on carbon tax proposals in 2016 and again in 2018. Almost 60 percent of voters rejected the first measure; the second one failed with more than 56 percent opposed.
Government subsidies for renewable energy are more popular. A January poll found (rather implausibly) that 67 percent of voters favored a carbon tax. But the same poll found that 82 percent of voters favored providing tax rebates for the purchase of energy-efficient cars and solar panels.
While carbon taxes have had trouble gaining traction in blue states, renewable energy subsidies have proven popular even in red states. Texas, for example, has become a leading producer of wind power thanks in part to generous subsidies for the technology.
So the political case for subsidizing renewable energy is clear. The economic case for these subsidies is also pretty strong.
Green energy subsidies don’t have all of the good properties of a carbon tax; they don’t properly reward emissions reductions through decreased energy usage, like living in denser housing, or walking instead of driving. But they do make energy usage less carbon-intensive, and they can accelerate research and development toward that end. Even if the US had a carbon tax that covered the full economic harms from carbon emissions, there would still be a strong case for subsidizing renewable energy technologies.
How subsidies drove down the cost of renewable energy
Perhaps the most positive environmental story of the last decade has been the plunging costs of renewable energy technologies. The cost of electricity from solar panels fell by almost 90 percent from 2009 to 2019. Wind power got 70 percent cheaper during the same period, while battery costs fell by 88 percent between 2010 and 2020.
The fundamental reason for this is economies of scale. Here’s how I described the process in a piece for Ars Technica last year:
Like most high-tech goods, batteries tend to get cheaper as they are manufactured at higher volumes. As the world builds more and more electric cars, grid storage installations, and other battery-based systems, higher volumes will drive prices lower and lower.
Economists define the "learning rate" as the percentage decrease in price for every doubling of output. BloombergNEF estimates that the learning rate for batteries is about 18 percent: every time global battery output doubles, prices fall by 18 percent.
The exact learning rate varies from one technology to another. But the same basic insight applies to solar power, wind power, and other renewable energy technologies.
This means that each person who buys a battery or a solar panel today is making the technology a little bit cheaper for everyone who buys it in the future. And once this process gets started, it can gain a momentum of its own: the technology gets cheaper, so more people buy it, allowing even larger scale and still lower prices.
For the last decade, governments in the US, Europe, and elsewhere have been throwing money at renewable energy technologies. Americans who buy battery electric cars can get tax credits as high as $7,500. Until 2019, Americans who installed solar panels on their roofs got 30 percent of the cost back from the federal government (since 2020 it has been 26 percent). Some states—as well as the District of Columbia, where I live—provide additional support on top of the federal subsidies.
Germany has had subsidies for solar power for more than a decade.
Some of these subsidies are quite generous—so generous that they might not make economic sense if you focus only on the carbon emissions they directly prevent. Shifting one driver from a conventional car to a battery electric car, for example, might not prevent $7,500 worth of environmental damage. But the more important benefit of somebody buying an electric car this year is that it makes electric cars a little bit cheaper next year, and every year after that, accelerating the transition to a renewable transportation system.
These policies have been a big success. Renewable energy probably would have gotten cheaper over time with or without government subsidies. But the subsidies likely accelerated the process and rewarded the early innovators who made it possible.
In sunnier climates, solar power is already becoming price-competitive with conventional sources of power. Battery electric cars are expected to reach price parity with conventional cars by the middle of the decade. At this point, these technologies might take over the world even without subsidies. But continuing to subsidize them will help the transition happen faster.
Renewable energy for the world
One of the best things about this approach is that it helps the entire world move off of fossil fuels—not just the state or country offering the subsidies.
Emissions in the US and Europe have been falling for more than a decade, while emissions are still rising in much of the developing world. So reducing global emissions will depend a lot on what happens in countries like China and India. These countries are much poorer than the US and may not be willing to sacrifice economic growth to reduce emissions.
In theory, Western governments could offer foreign aid to help developing countries transition to clean energy. But that would be administratively complex and—most likely—unpopular with voters. If a Western government subsidizes clean energy domestically, that provides a de facto subsidy to the rest of the world via lower prices.
Subsidizing renewables requires less coordination than other climate change policies. For example, a carbon tax must be applied consistently across markets; otherwise companies will shift carbon-intensive activities to regions without carbon taxes. There are ways to deal with these issues, but it’s complicated.
In contrast, if California voters care more about climate change than Texas voters, California can do plenty of good just by subsidizing renewables in California. That will not only reduce California’s carbon footprint, it will make renewable technologies cheaper in Texas, China, and everywhere else.
All of which is to say that I like the broad approach the Democrats are taking. Some of the proposed subsidies seem unnecessarily generous. For example, House Democrats have proposed boosting electric car subsidies from $7,500 to as much as $12,500. That seems excessive, especially given that battery prices continue to fall. I’m also not wild about proposals to give bigger subsidies for buying electric cars if they’re built in union plants.
But overall, I think it’s a good idea to continue subsidizing these technologies to further drive down their costs. And I’m particularly excited about proposals to subsidize new technologies like low-carbon jet fuel and direct air capture of carbon. Technologies like this would be a big help for combating climate change, and right now they’re far too expensive. New subsidies could start the same kind of flywheel process that made batteries and solar panels affordable over the last decade or two. And if they do, the lower costs will aid decarbonization efforts globally, not just in the United States.
Have you taken advantage of subsidies for solar panels, electric cars, or other clean energy technologies? Please leave a comment and tell me about it!