The Intergenerational Incidence and Social Welfare of Renewable Energy Support Policies vs. Carbon Pricing

This paper examines the lifetime and intergenerational economic incidence of renewable energy (RE) subsidies and carbon pricing for climate change mitigation, employing a calibrated dynamic general-equilibrium model with overlapping generations for the U.S. economy. We explore the political economy implications of the different regulatory approaches based on majority voting of generations alive at the time the policy is introduced. We emphasize issues for policy design focusing on the financing of RE subsidies and policy interactions with distortionary income taxation. Notwithstanding the supremacy of carbon pricing on grounds of aggregate efficiency, we find that smart designs for RE support policies, which link the financing of the support for RE technologies to the carbon intensity of fossil-based energy technologies, constitute a politically viable option.