Subsidizing clean energy would lower electricity prices while drastically reducing greenhouse gas emissions, according to a new paper from the University of Chicago’s Energy Policy Institute.
In fact, such an approach is the only policy out of three considered—the two others being carbon price and a clean energy standard—that reduced wholesale electricity prices throughout a 16-year period. The other two raised prices, as the above chart shows.
The paper, released in mid-July, is timely.
It came just a few days before Sen. Joe Manchin (D-W.Va.) struck a deal with Senate Majority Leader Charles Schumer (D-N.Y.) on a package of nearly $370 billion worth of clean energy spending, much of which is in the form of tax credits, over the next 10 years. Manchin is an essential vote for Democrats’ climate change priorities.
The Senate could take up the bill as soon as this week, though final passage is still uncertain.
Although Congress has debated for decades the potential for a clean energy standard or a carbon price, lawmakers have almost always only passed legislation subsidizing clean energy.
Subsidies have long been considered a politically easier but economically less efficient way to tackle climate change compared to a carbon price.
This paper suggests that such conventional wisdom could be wrong—for a particular reason and with important caveats.
The authors examined just the electricity sector, whose unique makeup is unlikely to transfer to other sectors like transportation.
“We found that the standard economic logic of carbon pricing doesn’t fit the electricity sector very well, due to the other pricing distortions in the industry that have necessitated other regulations,” said Severin Borenstein, co-author, professor and faculty director of the Energy Institute at the Haas School of Business at the University of California, Berkeley.
By making clean energy cheaper with subsidies, the federal government is effectively “counteracting” the higher electricity prices consumers are paying because of pricing distortions, said co-author Ryan Kellogg, a professor at the University of Chicago’s Harris School of Public Policy, in an interview with Cipher.
The paper considered technology-agnostic subsidies. The pending legislative package converts some technology-specific subsidies to be more tech neutral beginning in 2025 for at least seven years, according to an analysis of the bill by Washington Analysis, a research firm.
The less technology specific the subsidy, the better—as long as it reduces emissions, Kellogg said.
The potential that subsidies could lower electricity prices is critical because the power sector will play an increasingly central role in a clean energy economy as the transportation, buildings and manufacturing sectors all at least partially transition to being powered by electricity.
Although subsidies may save consumers money on their power bills, they’re costing someone—and in this case the government—more money.
In the pending legislation, the money to pay for subsidies comes largely from changing tax policy on other sectors, including corporations and private equity firms. Such provisions may prove problematic with another key Democrat, Sen. Kyrsten Sinema of Arizona.
The paper, which will be published in the Environmental and Energy Policy and the Economy journal, has important limitations because its focus is on the economics of electricity generation. It doesn’t consider transmission limitations or variability challenges with wind and solar, real-time hurdles that will surely affect electricity prices and emission-reduction efforts.
Kellogg said he hopes the paper inspires experts to apply it to more real-time grid models.