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Failed With Subsidies? – Try CO2 Tax!

Ricardo Barcelona


Subsidies and feed-in tariffs have become a pre-condition for wide-scale renewable energy deployment. However, outcomes after twenty years of generous technologyspecific support are diametrically opposed to policy objectives. This paper examines the causes of this apparent “green paradox”, and differentiates subsidies and CO2 tax’s influence on firms’ strategic decisions. I posit that subsidies choose a priori technology champions that ignore technological obsolescence risks. In contrast, CO2 taxes provide pricing signals that inform exit decisions from polluting technologies. By leaving firms to decide on their technological responses, CO2 tax penalties could encourage low carbon technology innovations.

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