Government subsidies - some alternatives

Subsidies can be useful for encouraging the growth of specific technologies, but they risk detrimentally affecting more general aims, and can make changes in the future difficult. In my previous discussion of the flaws in policy for distributed solar photovoltaic power, I touched on some of the problems with government subsidisation. It may be useful to explore the problems with subsidisation in a broader sense, and propose some alternative ways to accomplish the same goals.

Subsidies make emerging technologies much more economical for the end consumer, encouraging uptake of the technology by the general public. This is a great way to help make specific products or services more affordable for everyone. For more general goals, it is more useful to adopt generally supportive measures instead of specific subsidies. Moreover, subsidies become problematic as emerging technologies begin to take over in marketshare, and a situation develops where the dominant technology that is used is uneconomical and needs to be supported with government subsidisation. Subsidies then tend to remain, because of the political fallout from revoking them.

This problem is neatly illustrated in subsidies for fossil fuel electricity generation. While it might seem convenient now to take the point of view that some subsidies are good (ones that support saving the earth for example), and others are bad, one should pause and consider that at most points when subsidies have been enacted as part of government spending, they’ve seemed like a good idea. And once the government money starts being paid out, it’s hard to stop.

So if subsidies are something that should be avoided, how can we progress towards emissions-free energy generation? If renewable energy is to be broadly implemented as an electricity source sooner rather than later, some government encouragement is needed. Even the most effective renewable electricity costs on the order of twice that of fossil-fuel based power. The difference between the two needs to be made up somehow for there to be an economic incentive for the implementation of renewables.

The option that causes the least uneven market distortion, and the lowest costs to the government is adding costs to the technologies that are unfavourable (in this case energy generating lots of emissions). This causes consumers to start using cleaner technologies because they’re comparatively less expensive. This is what most countries are looking at doing variously through carbon taxes, emissions trading schemes, etc. But what about when you want the clean technologies to be adopted as quickly as possible, and you don’t want to put such high costs on fossil fuel power as to cause lots of job losses from power plant closures? Here are some ideas:

• Government-backed, low-interest loans for renewable energy technologies
  One of the biggest difficulties experienced by renewable energy technology companies is high project capital costs coupled with difficulty getting loans from banks for not-yet-proven commercial concepts. The government could assist here by providing some loans instead of direct subsidisation. Where banks would normally charge high-interest on the loans to offset the risk, the government could charge lower interest (with a view for the long-term benefits than for short-term profits).
• Increased research spending
  A lot of renewable energy technology companies can benefit from broad government support. This type of research would be aimed at providing information that helps all companies in a specific field; clear examples of this include compilations such as geothermal heat and solar flux maps, as well as research into energy storage technologies. The latter would benefit many different renewable energy technologies, as well as electric and hybrid vehicles (from battery-type storage).
• Funding pilot-scale projects
  For pilot-scale projects of unproven technologies, even low-interest loans might not be sufficient to get things underway (particularly if the pilot-scale project is unlikely to have commercial value in its own right). In these cases, where there is reasonable potential for the concept, the government could provide direct funding. If the project is successful, the funding could be converted into a government loan; if unsuccessful, the government could get ownership of all equipment and IP, using them to further renewable energy development.
• Temporary tax-exemption status
  While giving tax exemptions is similar to giving subsidies, it doesn’t work in quite the same manner. Where subsidies spend money from the budget towards a technology (that may or may not bring result in equivalent value to the country), tax exemptions don’t cost money directly. Instead, if the technology is of commercial value, there is a decrease compared to potential income for a period of time; if unsuccessful, there is no significant loss to the government. Critical to this idea is that an unmodifiable deadline is defined, so the benefits can be factored in to the companies’ finances.
• Direct investment matched to market capitalisation
  The government could also periodically invest in emerging renewable technologies directly; this would help provide some of the capital to get them started, with an expected payback in the long-term. This would need to be done in a manner that doesn’t rely on bureaucrats picking companies or technologies for investment. Ideally government funds would go to a pool to be paid out in response to bids from companies arbitrated by an independent panel.

Each of these possibilities have their own advantages and disadvantages. In particular, government support in ways where an expected financial gain might be expected in the long term are risky in that they encourage government intervention. They offer some interesting alternatives to subsidies, however.