Carbon Taxes and Renewable Energy Subsidies: A Discussion About . . .
125
that your partner will eat most of it within a day. Then, you better eat it faster.
Unfortunately, something similar holds true for global oil reserves.
More extraction implies more pollution. Eventually, pollution will fall because
production relies only on renewable energy. The problem is, however, that carbon
emissions accumulate. The first increase in carbon emissions will have long-lasting
climate impacts.
Final Discussion
Despite decades of climate negotiations, global emissions of greenhouse gases are
still rising. The solution to the climate problem is straightforward from an economic
point of view: putting a price on carbon. This price must be the same across countries
and depends on three elements: discount rate, carbon depreciation rate and climate
damages involved.
A carbon tax is the solution to climate change: It generates incentives both to
reduce emissions and to invest in renewables. With a carbon tax, companies using
fossil energy become relatively more expensive, while companies relying on alternative energy sources are relatively cheaper.
Given the unsuccessful international implementation of a global carbon tax, countries individually seek alternatives to the carbon tax, especially renewable energy
subsidization. However, renewable energy subsidies are not a substitute for carbon
emissions control through a carbon tax. Likewise, they can lead to an overall increase
in global carbon emissions. Subsidies may still be necessary if there are externalities
in the sector, typical of infant industries.
An essential takeaway of the analysis is that pursuing second-best policies is
dangerous: They come at a cost to local governments and economies, while they may
be unsuccessful in reaching the ultimate goal. The Green Paradox is an example.
References
Acemoglu D, Aghion P, Bursztyn L, Hemous D (2012) The environment and directed technical
change. Am Econ Rev 102(1):131–66
Archer D (2005) Fate of fossil fuel CO 2 in geologic time. J Geophys Res: Oceans 110(C9):C09S05
Barrage L (2018) Optimal dynamic carbon taxes in a climate-economy model with distortionary
fiscal policy. Rev Econ Stud
Belfiori ME (2021) Fossil fuel subsidies, the green paradox and the fiscal paradox. Econ Energy
Environ Policy 10(1)
Gerlagh R (2011) Too much oil. CESifo Econ Stud 57(1):79–102
Golosov M, Hassler J, Krusell P, Tsyvinski A (2014) Optimal taxes on fossil fuel in general equilibrium. Econometrica 82(1):41–88. https://doi.org/10.3982/ECTA10217
Hotelling H (1931) The economics of exhaustible resources. J Polit Econ 39(2):137–175
125
that your partner will eat most of it within a day. Then, you better eat it faster.
Unfortunately, something similar holds true for global oil reserves.
More extraction implies more pollution. Eventually, pollution will fall because
production relies only on renewable energy. The problem is, however, that carbon
emissions accumulate. The first increase in carbon emissions will have long-lasting
climate impacts.
Final Discussion
Despite decades of climate negotiations, global emissions of greenhouse gases are
still rising. The solution to the climate problem is straightforward from an economic
point of view: putting a price on carbon. This price must be the same across countries
and depends on three elements: discount rate, carbon depreciation rate and climate
damages involved.
A carbon tax is the solution to climate change: It generates incentives both to
reduce emissions and to invest in renewables. With a carbon tax, companies using
fossil energy become relatively more expensive, while companies relying on alternative energy sources are relatively cheaper.
Given the unsuccessful international implementation of a global carbon tax, countries individually seek alternatives to the carbon tax, especially renewable energy
subsidization. However, renewable energy subsidies are not a substitute for carbon
emissions control through a carbon tax. Likewise, they can lead to an overall increase
in global carbon emissions. Subsidies may still be necessary if there are externalities
in the sector, typical of infant industries.
An essential takeaway of the analysis is that pursuing second-best policies is
dangerous: They come at a cost to local governments and economies, while they may
be unsuccessful in reaching the ultimate goal. The Green Paradox is an example.
References
Acemoglu D, Aghion P, Bursztyn L, Hemous D (2012) The environment and directed technical
change. Am Econ Rev 102(1):131–66
Archer D (2005) Fate of fossil fuel CO 2 in geologic time. J Geophys Res: Oceans 110(C9):C09S05
Barrage L (2018) Optimal dynamic carbon taxes in a climate-economy model with distortionary
fiscal policy. Rev Econ Stud
Belfiori ME (2021) Fossil fuel subsidies, the green paradox and the fiscal paradox. Econ Energy
Environ Policy 10(1)
Gerlagh R (2011) Too much oil. CESifo Econ Stud 57(1):79–102
Golosov M, Hassler J, Krusell P, Tsyvinski A (2014) Optimal taxes on fossil fuel in general equilibrium. Econometrica 82(1):41–88. https://doi.org/10.3982/ECTA10217
Hotelling H (1931) The economics of exhaustible resources. J Polit Econ 39(2):137–175