Subsidies

Abstract

Subsidies and carbon taxes are often applied naively using similar policy tools in different energy markets, largely premised on grid price parity principles. This chapter argues that a persistent green paradox results when “correct” subsidies become indeterminate under volatile energy prices. Consequently, instead of securing payoffs, subsidies become a source of uncertainties: Set too low, they are insufficient to equalise costs; and if they are set too high, consumers underwrite the economic rent accruing to investing firms for not taking risks, inviting regulatory backlash. The problem comes to a head when “too high” and “too low” alternate as fuel prices fluctuate. To address this policy dilemma, the role of subsidies is reframed as a decision-switching mechanism, while recognising policy’s lack of ability to foresee how specific technology evolutions may proceed. Hence, by asserting the influence of policy sparingly through energy pricing, managers are rewarded or penalised for outcomes of the decisions they take by assuming risks and exercising their supply choices.

This chapter is adapted from the paper presented by the author and Bernardo M. Villegas, co-founder of University of Asia and the Pacific, Philippines, at the 18th International Symposium on Ethics, Business and Society, IESE Business School, Spain, from 30 June to 1 July 2014.