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As hope fades that the Senate will implement a cap on carbon emissions, many are wondering if a package of clean energy subsidies and energy efficiency measures can get the job done instead.

Economists have long argued that smart climate policy must involve three components: a carbon price or cap, regulatory standards, and public investment in research, development, and deployment of clean energy technologies.  A cap without public investment will raise the price of fossil fuel energies, without offering consumers and businesses alternative clean energy solutions. But what if we subsidized clean energy without capping emissions?

A recent paper by Emma Hutchinson, Peter W. Kennedy, and Cristina Martinez at the University of Victoria sheds some important light on this debate. This paper examines the impacts on emissions of subsidies for clean energy production. The standard argument in favor of clean energy subsidies is that subsidies will increase the production of low-carbon energy while decreasing the production of high carbon energy (e.g. coal). However, this study examines possible unintended effects of clean energy subsidies.

As they explain, clean energy subsidies not only shift the composition of the energy supply, they also decrease the average price of electricity. The decrease in the price of electricity gives rise to a “consumption effect” – consumers and businesses consume more energy at the lower price. If the alternative low-carbon energies are not “clean” enough, the combination of lower energy prices and higher overall consumption of energy outweighs the shift in energy composition from high-carbon to lower-carbon sources. As the authors posit, it is very likely that U.S. subsidies for ethanol fall in this category of clean energy subsidies that have had an unintended effect on emissions.

What does this mean? Well..it does NOT mean that we should stop championing clean energy subsidies and public investment in clean energy technologies and energy efficiency. There is no path to emissions stabilization that does not include public investment and other public policies to encourage rapid adoption of low-carbon energy and energy efficiency.

What it DOES mean is that economists have been right about the importance of a carbon price or cap on emissions. If emissions are firmly capped, subsidies for clean energy technologies will have their intended effect: shifting the mix of energy consumed in the U.S. away from fossil fuels and decreasing emissions.

by Kristen Sheeran, Executive Director Economics for Equity and the Environment Network