Policy Design Question

Posted in: Comment, News and Updates

When you are trying to encourage one thing and discourage another – say a technologically-driven shift from brown to green(er) widgets – is it better to subsidise the green type or tax the brown?

This is a question that I'd not given much thought to until I read an article in the Economist's Free Exchange column this week: Solarpunked.  And yet it must be of great concern to anyone in government or business encouraging transitions to net-zero.

The Economist feature delves into the rebound effect and the elasticity of substitution – mostly beyond me – but some hard facts seem to arise from previous experience.  Here's one example: the need to save fuel can spark innovation in existing products rather than promote the replacement of that product.  The 1970's oil price shock did not kill off the car but resulted in engines that were a bit more efficient.  This eventually resulted in bigger cars and more of them and the car was further embedded in the culture.

Here's the last part of the article:

"Subsidising clean technologies rather than taxing dirty ones—the strategy adopted by President Joe Biden’s recent Inflation Reduction Act—does not do nearly as much to displace fossil fuels. A family may buy a subsidised battery-powered vehicle, for instance, but only to complement a fossil-fuel one, which they can continue to drive without penalty. Policy design matters if a zero-carbon world is to become more than just another future that never happened."


As I drive my large-ish 8-year old diesel car, leaving my low range (8-year old) electric car at home, I ponder that paragraph as that's exactly what I did: buying an electric car to complement a fossil-fuel one which I drive without penalty (unless you count the cost of fuel).  Mind you, there are increasing costs (ie penalties) associated with the electric car owing to the rise in the price of electricity.

So, 8 years on, should we replace both cars with a (large-ish) electric one?

Well, the purchase price is huge as there are no brown to green incentives in place – and there are no tax incentives either as the brown diesel still meets environmental standards and qualifies for a ludicrously small road tax.  What to do ...

Wait and see seems the rational response; wait until the tax / incentives balance shifts again to either make us or persuade us to ditch the diesel.

There is another issue here as well: high milage electric cars are huge – humungous even.  I saw one yesterday that looked like a tank.  It was set out in gun-metal grey which didn't help, but even so.  Huge.  I don't want a humungous car as my only car to make local trips where all the parking slots are smaller than the car.  Madness.


If you read the Economist article, I recommend looking at the Less is More one as well.  In particular, ponder the conundrum of Groningren with policy design in mind ...

Posted in: Comment, News and Updates


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