Most popular reasons for subsidizing renewables don’t make sense

Intergovernmental Panel on Climate Change recently released a set of major reports. Working Group I said that we must limit severely the amount of greenhouse gases we release if we are to stay below 2°C increase over pre-industrial times. Working Group II discussed changes we will see, and could see, if we do not meet this goal. Working Group III said that if we make good choices about how to reduce GHG emissions, mitigation could be fairly cheap.

With that in mind, it makes sense to look at policies both in place and planned. One such policy is direct subsidies and mandates, an indirect subsidy, to renewables, particularly wind and solar. Wind and solar are expected to be important in the 2050 time frame, with solar and wind together expected to supply between 20 and 60% of electricity capacity, depending on the region, according to the 2012 International Energy Agency Energy Technology Perspectives. (Capacity refers to the amount of electricity that can be produced at maximum operation. Because wind and solar power have a lower capacity factor than nuclear or fossil fuels, their actual contribution will be much lower.)

Currently, the majority of U.S. states and a number of countries subsidize or/and mandate renewables. They usually subsidize capacity (paying per megawatt built) or electricity (per kWh), or require a set percentage of power to come from renewables (33% in California by 2020, although some can be built out of state).

Renewables include energy from hydroelectric (although some governments don’t count large hydro); biomass or bioenergy—generally agriculture waste and landfill gas, although future plans include dedicated crops; wind; geothermal; sun; and tidal or other forms of marine power. (Geothermal is not technically renewable on a human time scale, as wells tap out.) The sun is used to make electricity using two different technologies: making steam, which is then used in the same way fossil fuel or nuclear steam is used, and solar panels, or photovoltaics (PV). Renewables can be used for electricity, heat (particularly sun and biomass) or transport (particularly biofuels). These two posts will examine only renewables used for electricity.

In many places, renewables subsidies exist because they are politically acceptable, and solutions economists favor are not. Highest on economists’ list is adding a steep cost through a tax or cap and trade program. Upcoming blogs will examine why, and the differences between these. The current so-called social cost of fossil fuels, the cost society pays, but the polluter does not, is $37/ton carbon dioxide. (A number of economists say this is too low, and give wonk reasons to support their thinking. They say, in part, that “because the models omit some major risks associated with climate change, such as social unrest and disruptions to economic growth, they are probably understating future harms.” This short article is worth reading.)

Assuming we adopt a tax or cap and trade: will it make sense to continue subsidizing or/and mandating renewables? Economists ask: is there a market failure that cannot be addressed sufficiently by including the steep cost of greenhouse gas (GHG) emissions in the price, that will require other policy interventions? Internalizing a social cost of $37, adding 4 cents or so/kWh of coal power, about half that to natural gas power, makes renewables more attractive because fossil fuels are more expensive. However, the goal is not to make renewables more attractive, but to solve a number of market problems. Economists don’t see their goal as favoring certain solutions, but making the market work better by removing market failures. Of these, the most important is the failure to price fossil fuel pollution correctly.

Two papers I read recently look at direct or indirect subsidies to renewables. Severin Borenstein, in The Private and Public Economics of Renewable Electricity Generation, finds most arguments made in favor of renewables subsidies do not make stand up under scrutiny. (See next post for a discussion of the other paper.)

Wind is currently close to fossil fuels in price, but wind has several disadvantages (it is non-dispatchable, tends to blow more when it is less needed, and requires expensive and GHG-emitting backup power). While coal and natural gas do get subsidies, these are a fraction of a cent/kWh. Renewables get hefty federal subsidies, such as 2.1 cents/kWh for wind, and more for solar. [These are supplemented by state subsidies.]

What benefits of renewables are not addressed by adding a cost to greenhouse gases, and so justify subsidies to renewables? Borenstein looks at a number of assertions:

• Some renewables decrease pollution other than greenhouse gases, pollutants that damage human health (as well as ecosystems and agriculture).

This is an additional important part of polluter pay not being considered today. However, this cost to human health, etc. is more variable, and depends on population density, climate and geography. General subsidies for renewables would not make sense—subsidies must target power plants doing the most damage. That is not done today.

• Increasing the use of renewables will increase energy security, because the U.S. will produce more of its own electricity.

Since the U.S. uses U.S. coal and natural gas, U.S. rivers, and so on, this argument doesn’t seem to apply here (it might apply elsewhere). This argument could apply to oil imports, and electric cars, if they are successful, could replace imported oil. However, coal and natural gas are cheaper, they would be more effective than renewables in replacing oil in transportation, and renewables have no inherent advantage.

• Subsidies for renewables will lead to more learning by doing, and this will lead to lower prices.

However, this subsidy for renewables only is appropriate if society benefits rather than the particular company. And there appears to be little support that this oft-cited factor has been important to the decrease in solar panel prices over time. There is more support for evidence that technology progress in the space program and semiconductors, as well as an increase in the size of solar companies, has had more effect.

• Green jobs will follow, as renewables require more workers (or/and more workers among the unemployed and underemployed).

This statement has two components. There is uneven support for the idea that renewables and energy efficiency employ more people than other fields of energy. They may even target workers who have more trouble getting work, a social benefit. The longer term argument is that this will build a renewables industry, although evidence in Germany and Spain does not appear to support this idea. Studies might provide support for one or both ideas.

• Lower costs for fossil fuels will follow decreases in the cost of competing forms of energy.

The evidence for this is scarce.


The main justification discussed so far for renewables subsidies over adding a cost to greenhouse gas emissions appears to be that society allows subsidies and does not allow a tax. The next post will examine an additional reason, the role subsidies play in increasing research and development.

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