Why renewable subsidies are better than carbon taxes

Democrats got this one right, and economists were left in the dust.

The Inflation Reduction Act is first and foremost about creating abundance — about lowering the cost of living for the average American. It also just so happens to be the most significant piece of climate legislation in U.S. history. Climate wonks are overjoyed, and rightly so.

But the IRA didn’t approach climate change the way most climate economists wanted it to. For decades, climate economists have focused rather obsessively on the idea of carbon taxes. While Democratic politicians were talking about investment and green jobs and technology, climate economists were maintaining their laser-like focus on measuring the “social cost of carbon” so we could design the perfectly-sized tax. Bob Kopp of Rutgers has a good thread of soul-searching about why climate economists ended up making themselves so irrelevant to climate policy, and what could be done to correct course:

Bob Kopp @bobkopp

Environmental economists should probably take a moment of humble reflection to ask whether the discipline’s focus on first-best carbon pricing mechanisms contributed to how long it has taken to get US climate legislation

Except for a tax on methane emissions, the IRA employs subsidies rather than taxes. Instead of charging companies for emitting greenhouse gases, subsidies pay companies to switch to specific renewable technologies like solar power and electric vehicles. Economists tend to think carbon taxes are superior to subsidies, because taxes allow companies to reduce emissions by whatever is the most efficient method (renewables, energy efficiency, simply cutting production, etc.), while subsidies focus only on specific alternatives for specific pieces of the emissions puzzle.

So why have climate policymakers so resolutely ignored carbon taxes and focused on subsidies instead? Part of the reason is politics — taxes make people feel poorer, even if you pair them with cash benefits, which is why carbon tax initiatives fail at the ballot box even the greenest of states. But in fact there’s a deeper economic reason why they IRA’s subsidy-centric approach is better than what climate economists would have given us. Renewable technology subsidies are simply a better climate policy than carbon taxes, and the climate economists didn’t realize this because they were asking the wrong question.

The real climate problem