Demand Subsidies vs. R&D: Comparing the Uncertain Impacts of Policy on a Pre-Commercial Low-Carbon Energy Technology

Abstract

We combined an expert elicitation and a bottom-up manufacturing cost model to compare the effects of R&D and demand subsidies. We modeled their effects on the future costs of a low-carbon energy technology that is not currently commercially available, purely organic photovoltaics (PV). We found that (1) successful R&D programs reduced costs more than did subsidies, (2) successful R&D enabled PV to achieve a cost target of 4c/kWh, and (3) the cost of PV did not reach the target when only subsidies, and not R&D, were implemented. These results are insensitive to two levels of policy intensity, the level of a carbon price, the availability of storage technology, and uncertainty in the main parameters used in the model. However, a case can still be made for subsidies: comparisons of stochastic dominance show that subsidies provide a hedge against failure in the R&D program.