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.