How Should Governments Subsidize Clean Tech Innovations?
Whether for home solar panels or electric vehicles, it’s common for governments to offer consumers subsidies for buying and using sustainable products. Unfortunately, it’s an imperfect process: given the uncertainty of market demands, it’s difficult to project numbers that correlate accurately with sales.
Why settle for inaccurate, ineffective subsidies? Shouldn’t there be a better way to calculate them? The short answer is yes, and a new paper by MIT researchers sought to find out how. The paper shows that governments are likely to make subsidies too low due to market uncertainty, and ways in which it can be improved. Their intention was to design a better way to back clean technology.
The paper, co-authored by doctors and professors Georgia Perakis, Maxime C. Cohen, and Ruben Lobel, is called “The Impact of Demand Uncertainty on Consumer Subsidies for Green Technology Adoption.” It was published online by Management Science.
Governments typically provide subsidies based on overall adoption targets: the number of products they’d like to see adopted over a period of time, rather than a realistic projection. Since cleantech products are usually new, it’s hard to know whether the demand will be huge or non-existent without a crystal ball.
To figure out better model for subsidies, the project examined existing products and their subsidy levels to determine whether the subsidy was effective. They concluded that in most cases, the subsidy should have been as much as five times higher to kickstart sales.
Higher subsidies, the authors say, is critical for cleantech product launches because it helps sell products faster and at a higher volume. These increased subsidies should pay for themselves, they say, because of the estimated savings in the larger context by preventing environmental damage and the costs associated.
The paper found that higher subsidies would drive the adoption of green technologies in their early stages, spurring their growth. As sales grow, the subsidy level could be adjusted accordingly.
The research has been called “important and timely” by experts, but not all are on the side of subsidies for innovation. Subsidies, the contrarians say, can put undue strain on government finances and are unable to respond to market changes, which can lose investors money. Still, I remain optimistic about overall adoption of new clean technologies: if there is value in subsidies for the earth and for consumers, and accuracy is prioritized, it’s a win-win scenario.
Featured image: Tony Hall via Flickr