![]() It can’t be halted on a promise that everybody wins except producers of fossil fuels-the fiction that makes subsidies-first ‘politically realistic.’ Government borrowing only delays the inevitable. But if governments sincerely want to hit that target, they’ll have to take subsidy-first back to the drawing board and start being honest with voters about the costs of fighting climate change. The most plausible forecast, given these numbers, might be that net zero just won’t be achieved by 2050. As a practical matter, persisting with subsidies-first is therefore likely to be impossible. But politics as usual-subsidies or bust- raises debt by roughly 50% of GDP.Įven assuming no new energy-subsidy programmes, the trajectory of public debt is already unsustainable in the US and many other countries. The balanced package has more government spending, so raises debt by a little over 10% of GDP. If this seems modest, remember that carbon pricing raises less revenue as time goes by because it works as intended. The carbon-pricing approach to net zero cuts public debt by roughly 3% of GDP between now and 2050. A third, call it ‘politics as usual,’ assumes that carbon prices won’t rise much more over the next few decades, leaving subsidies to do it all. A second assumes a “well-sequenced package" that mixes higher spending and higher revenues through carbon pricing, subsidies and targeted transfers to households squeezed by dearer energy. One strategy relies entirely on carbon pricing. Economists at the IMF have devised scenarios with different policies for a “representative advanced economy" to reach net zero by 2050. The drastic fiscal consequences of this subsidy-first strategy needs urgent attention. Regulation can close some of this gap-but with limits set by politics. ![]() So Americans can and will continue to run their factories, heat their buildings and power their oversized vehicles using fossil fuels at prices that fail to capture the cost of emissions. Yet, unlike the EU, the US lacks anything like a comprehensive carbon-pricing system. Other things equal, and assuming optimistically that other constraints on electricity-grid infrastructure don’t delay things, this will hasten the adoption of low-carbon technologies. Its so-called Inflation Reduction Act is subsidy-first: It spends roughly $400 billion over 10 years on schemes including support for green energy and EVs. The US leads the world in ignoring the price of carbon. According to plausible calculations, to get emissions on the path to net zero by 2050, it would have to be about $75 a tonne (and $130 a tonne in rich economies) by 2030, and then rise thereafter. Globally, the average price of carbon is about $5 per tonne. The cost of renewables has fallen sharply in recent years, but so long as fossil fuels remain underpriced, they’ll be overused. ![]() Only 20% are taxed, typically at rates far lower than their costs. ![]() Another 65% are neither subsidized nor taxed. Even now, around 15% of global emissions are actually subsidized. Some countries have explicit or implicit carbon taxes to align the price of fuels with the costs their emissions impose on the planet. It also ignores the fiscal consequences that’ll likely catch up. Yet, this choice leaves many incentives for high carbon emissions undisturbed, which slows the transition. Subsidies to cheapen clean power make everyone feel like a winner, for a while anyway. Policymakers resist taxes to make fossil fuels dearer because it creates losers. Both failings arise from the need to make climate policies more politically appealing.
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