Publication

How Effective are U.S. Renewable Energy Subsidies in Cutting Greenhouse Gases?

Maureen L. Cropper, Brian C. Murray, Francisco de la Chesnaye and John M. Reilly , December 2014.
Abstract:

The contributions of greenhouse gases, especially carbon dioxide, to global warming are now widely recognized.  The impending dangers of climate change have launched efforts to increase the use of renewable energy sources such as wind, solar, and biomass to replace fossil fuels. Wind and solar power do not involve burning fossil fuel in order to create energy and therefore do not produce carbon dioxide.  Although carbon dioxide is emitted in the process of producing energy from biomass, the cycle of plant growth, combustion and regrowth can in principle be made “carbon neutral.” In line with the goal of increased use of renewable energy, the United States has implemented various provisions in the federal tax code that reward the use of renewable energy and, in 2009, called on the National Research Council (NRC) to examine the effect of the federal tax code on the country’s greenhouse gas (GHG) emissions. As part of the NRC study, Professor Maureen Cropper and her collaborators focus on the largest renewable energy subsidies incorporated in the tax code—the production and investment tax credits for renewable electricity, and the tax credits for the production and use of biofuels.

Murray, Cropper, de la Chesnaye and Reilly use the National Energy Modeling System (NEMS) to analyze the effects of the renewable electricity provisions, and the Food and Agricultural Policy Research Institute—University of Missouri Model to analyze the effects of the biofuel provisions. The two models were provided with common assumptions about rates of GDP growth, energy demand and world oil prices and then used to estimate the direct and indirect effects of both sets of provisions. The analysis based on NEMS implies that the renewable electricity tax credits led to a decrease in U.S. carbon dioxide emissions through an increase in renewable power generation, though the change was small relative to the total amount of electricity generated. The analysis of the impacts of biofuel tax credits produced much more surprising results. While subsidies for biofuels might have been expected to reduce carbon emissions, the results suggest that, in fact, they had the opposite effect, leading to an increase in carbon dioxide emissions. An important factor contributing to this surprising finding is that the biofuel provisions encouraged motor fuel consumption by lowering the price of blended fuels.

Although sometimes billed as efforts to reduce GHG emissions, the motivations behind the renewable energy provisions studied by Cropper and her co-authors were in fact more complicated, with the sponsors of the provisions also interested in energy security, spurring “green” technology growth, and rural economic development.  Further, the provisions are narrowly targeted at only a few emitting activities. Cropper et al conclude that, unless a political consensus in support of a more comprehensive GHG tax or cap and trade program can be achieved, progress with respect to reducing GHG emissions is likely to be modest.   

 

Citation:

Maureen Cropper, Brian C. Murray, Francisco de la Chesnaye and John M. Reilly, American Economic Review Papers and Proceedings 104(5), 569-574, May 2014.

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