Subsidies: unfair and inefficient

Subsidies are criticized for their arbitrary nature, raising concerns about their effectiveness as a primary instrument for supporting the green transition.

The allocation of subsidies through political processes can be arbitrary and convoluted, divided between federal and state legislatures, often favoring certain corporations over others and disproportionately benefiting wealthier individuals who can afford to install solar panels on their roofs. By contrast, low-income renters who do not own their own homes often miss out on such opportunities, raising concerns about the fairness of these policies.

Subsidies are also controversial because of their weak connection to actual greenhouse-gas emission reductions. Since these subsidies are only loosely tied to emission outcomes, they may not represent the most cost-effective means for governments to achieve climate goals. For example, electric-vehicle subsidies are typically provided as a fixed amount, regardless of how much the vehicle is used.

Economists warn that subsidies may disrupt markets, as they can unfairly favor inefficient corporations over their more dynamic competitors.

Subsidies, for instance those paid per kilowatt-hour generated by solar and wind power plants, guarantee long-term contracts at a minimum price, which may discourage recipients from further investment to reduce costs and prices, effectively protecting inefficient firms from competition by alternative products.

In this context, economists increasingly advocate a shift toward carbon pricing as a more efficient policy instrument—less arbitrary and more conducive to healthy market dynamics.

Subsidies, deemed unfair and inefficient, are losing political support. As the renewable-energy market becomes more competitive, they are being phased out.

Subsidies were instrumental in helping the nascent green market attract its initial customers, paving the way for mass production and cost reductions in solar panels, wind turbines, and electric vehicle batteries—key components of the green transition.

The expectation is that as production scales up, the prices of these green products will continue to decline, eventually outcompeting fossil fuels in a dynamic market free from the distortions caused by subsidies. Many in Congress now believe the time is right to phase out these subsidies.