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Renewable energy subsidies versus carbon capture and sequestration support

Abstract

We propose an equilibrium model where final-goods production uses labor and energy, and energy production uses non-polluting Renewable Energy Sources (RES) and polluting fossil fuels. Our goal is to compare two alternative Green Tax Reforms (GTRs). In one of the GTRs, carbon tax revenues are used to support Carbon Capture and Sequestration (CCS) activities. In the other GTR, tax revenues are used to subsidize RES. The comparison between the two GTRs is focused on three indicators: output per worker, energy intensity and the ratio of renewables over non-renewables. Results show that, in theory, the GTR with the RES subsidy could benefit both the economy and the environment if resource substitution was strong enough. The GTR with CCS support necessarily decreases output since abatement only partially alleviates the tax burden. The empirical simulation indicates that, for most tax values, both GTRs imply an economic slowdown but benefit the environment. The GTR with RES subsidies appears to be preferable than the alternative one, especially for lower tax levels.

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Notes

  1. Energy efficiency is also an important tool to reduce emissions but it is not under study in this paper.

  2. The literature on Green Tax Reforms (GTRs) is beyond the scope of this paper, however, the logic behind these reforms is that carbon tax revenues can be recycled to reduce previously existing distortionary taxes (first generation of GTRs) or used in other environmental beneficial manners, which is the case here (new generation of GTRs).

  3. It is common in this literature to focus on the central planner case (Gerlagh and van der Zwaan 2006; Duan et al. 2013; Zhu et al. 2015) which despite having some advantages, is not able to capture the behavior of firms in the economy.

  4. In this first approach to this topic, we aim to keep the model as simple as possible, however, we acknowledge that a more complete production function would increase the realism of the model. We intent to do that in future research.

  5. In reality CCS activities are complex and involve several important issues, e.g., leakage possibilities, high installation costs, high transport costs, dealing with storage options and decisions. Ultimately, there is a debate on the possibility of increased coal consumption and hence increased emissions resulting from CCS. For simplicity, in this paper we abstract from these issues.

  6. To simplify notations, we suppress the time argument t and will do so in most of the following deductions.

  7. Once again, for simplicity, we suppress the time argument.

  8. Idem.

  9. We thank an anonymous referee for this observation.

  10. Idem.

  11. http://www.eia.gov/coal/production/quarterly/co2_article/co2.html.

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Acknowledgments

Susana Silva gratefully acknowledges the financial support of “Fundação para a Ciência e Tecnologia” (FCT - Portugal), through the Grant SFRH/BPD/86707/2012.

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Correspondence to Susana Silva.

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Silva, S., Soares, I. & Pinho, C. Renewable energy subsidies versus carbon capture and sequestration support. Environ Dev Sustain 20, 1213–1227 (2018). https://doi.org/10.1007/s10668-017-9935-7

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  • DOI: https://doi.org/10.1007/s10668-017-9935-7

Keywords

  • Carbon capture and sequestration
  • Renewable energy sources, Environmental policy
  • Economy

JEL Classification

  • O44
  • Q32
  • Q43
  • Q48