The U.S. government is on the cusp of its largest-ever embrace of carrots to tackle climate change.

Almost every law the government has ever passed on climate change and energy policy has been to reward (give carrots to) the types of energy it wants, instead of penalizing the kinds of energy it doesn’t want (prodding it with a stick). This carrot approach has persisted despite decades of perennial debate and failed efforts on policies that are more stick-like: carbon taxes, regulations and mandates.

The reasons why are shockingly simple. It’s easier politically…

To the surprise of some economists, subsidies are also cost-effective forms of cutting power-sector emissions, according to two separate analyses by the University of Chicago, one of which was done in conjunction with Rhodium Group, a research firm.

The benefits from lower carbon emissions are roughly three to four times greater than the costs of clean energy tax credits. Wind and solar costs have dropped and are closing the gap with electricity powered by coal and natural gas, said Michael Greenstone, co-author of that study who led the White House Council of Economic Advisers under President Obama.

“I’ve been pretty negative about subsidies,” said Greenstone, now economics professor at the University of Chicago, where he leads the school’s Energy Policy Institute. “But the costs have changed, and now some types of subsidies can deliver meaningful carbon reductions.”

The other study, released last month and covered in Cipher last week, found that subsidies actually lower electricity prices for consumers while reducing emissions about as much as a carbon tax or energy standard (the other two raised power prices)…

Continue reading at Cipher…

Areas of Focus: Energy Markets
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As countries around the world implement policies to confront climate change, EPIC research is calculating which policies will have the most impact for the least cost.