Subsidies: politicized and market-disruptive
While subsidies have the potential to contribute to the green transition, their passage through Congress is uncertain due to perceptions of unfairness.
The allocation of subsidies through political processes can be arbitrary, often favoring certain corporations and individuals over others, leading to concerns about market disruption. Additionally, subsidies must be approved by both Federal and State Congresses, which can create disconnects between federal subsidies and state tax policies, especially if state-level tax increases negate the benefits of the subsidies.
Currently, subsidies tend to benefit wealthier individuals more than low-income households. For example, affluent households can afford to install solar panels on their roofs, whereas low-income renters often lack such opportunities. Similarly, subsidies for electric vehicles are provided as a fixed amount, regardless of how much the vehicle is used. While subsidies per kilowatt-hour generated by solar and wind power offer a slight improvement, long-term contracts guaranteeing a minimum price may discourage recipients from further lowering costs. Since these subsidies are only loosely tied to greenhouse gas (GHG) emission reductions, they may not provide the most cost-effective means for the government to achieve emission cuts. As a result, economists are increasingly advocating for a shift towards carbon-pricing methods as a more efficient alternative.