Low-Energy Fridays: How Long Should Energy Subsidies Last?
The passage of the “One Big Beautiful Bill Act” means that subsidies for wind and solar power are slated for repeal after 2027. Unsurprisingly, this has sparked a litany of analyses explaining just how catastrophic the end of these subsidies will be for the United States and the world. While there’s good reason to doubt those claims, they shouldn’t be dismissed out of hand. The lingering question of how ending wind and solar subsidies will impact climate progress is worth scrutinizing, and an appreciation of some economic basics can help Low-Energy Fridays readers navigate the chaos.
The importance of subsidies in any industry is hotly debated, but in the realm of energy policy, the big question often is “Does this subsidy stimulate innovation?” If that seems confusing, consider that subsidies don’t really reduce costs or payments; rather, they shift those costs from the subsidized entity to the taxpayer. This means the net economic effect of a subsidy is a wash at best, though it’s usually a net economic negative because the downsides of current or future tax increases tend to outweigh the upside of subsidies.
However, a subsidy can be economically beneficial when it shifts economic activity to something that’s economically improving but underinvested in. The classic example is “basic scientific research,” the earliest stage of research and development (R&D). While the economic utility of those subsidies is low in the near term, economists almost universally agree that these activities are worth subsidizing because they will yield economically valuable innovations in the future. Conversely, subsidizing mature, commercialized technologies has little innovation benefit because the private sector already has an immediate profit motivation to invest in those activities (as evidenced by far larger R&D expenditures).
Where things start to get murky is between early-stage R&D and mature, commercialized technology. Wind and solar subsidies as we know them today began in the 1990s when the technology was still nascent, and the thinking was that subsidies could jump-start some economies of scale and bring costs down to move a future economic benefit forward in time. Some think it was right and others think it was wrong, but that’s not important for this piece. The important bit is that, while the subsidies are still around 30 years later, wind and solar costs are now flat. This means there’s much less opportunity for subsidies to stimulate additional innovation that would reduce costs. Today’s wind and solar subsidies support mature, well-capitalized, commercial technologies.
Subsidizing industries that don’t need taxpayer support is economically unwise. Fossil fuel subsidies, more common in poorer countries eager to mitigate energy costs, are a prime example of economically harmful subsidies. There’s no innovation or productivity to gain from these subsidies; they merely shift wealth around and (ironically) shield the subsidized industries from competition and any incentive to innovate. Applying this same logic to wind and solar subsidies, we see no good economic rationale for unending subsidies.
Of course, there’s also a public welfare component in the form of potential climate benefits of wind and solar subsidies, though some scrutiny is warranted here. While these subsidies have some impact on clean energy growth, there should be some concern about the idea that the subsidies are essential for clean energy growth and climate policy, given their diminishing innovation potential. If perpetual wind and solar subsidies were truly necessary for climate policy, it would ironically validate critiques of renewable energy as technologies that can’t compete without subsidies. This would dramatically diminish their potential for global scalability, given that many parts of the world can’t afford clean energy subsidies.
At R Street, we believe the assertion that wind and solar power need large subsidies to be competitive in the market is incorrect. The unsubsidized cost of wind and solar is still competitive with other generation sources, and more importantly, clean energy has considerable market value. Global clean energy investment is the largest it has ever been because it’s cheap and people want it—not just because of subsidies.
Consequently, continued wind and solar subsidies can ironically harm broader climate policy objectives by shielding industry from the competition they must overcome to scale globally. Subsidies for mature incumbent technologies also have the bad side effect of stifling innovation, as it’s not enough for emerging technologies to be cheaper than incumbents—they must be cheaper than incumbents plus their subsidies.
To address climate change, we need clean energy to be financially viable, even in parts of the world without clean energy subsidies. This requires productivity improvement. Subsidies diminish the incentive for productivity improvement by making technologies profitable regardless.
More simply, we’re not going to solve climate change by expecting the whole world to willingly embrace a California-esque energy policy that dramatically shifts clean energy costs onto taxpayers. The plan was always that wind and solar would be free to compete on their own merits once they became cost-competitive. Unending subsidies for wind and solar are fundamentally at odds with innovation, and they hurt our long-term climate policy goals.