Editing IPCC:AR6/WGIII/Chapter-13 (section)

==== 13.6.3.5 Subsidies for Mitigation ====

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Subsidies for mitigation encourage individuals and firms to invest in assets that reduce emissions, changes in processes or innovation. Subsidies have been used to improve energy efficiency, encourage the uptake of renewable energy and other sector-specific emissions saving options (Chapters 6 to 11), and to promote innovation. Targeted subsidies can achieve specific mitigation goals yet have intrinsically narrower coverage than more broad-based pricing instruments. Subsidies are often used not only to achieve emissions reductions but to address market imperfections or to achieve distributional or strategic objectives. Subsidies are often used alongside or in combination with other policy instruments, and are provided at widely differing cost per unit of emissions reduced.

Governments routinely provide direct funding for basic research, subsidies for R&amp;D to private companies, and co-funding of research and deployment with industry ( [[#Dzonzi-Undi--2016|Dzonzi-Undi and Li 2016]] ). Research subsidies have been found to be positively correlated with green product innovation in a study in Germany, Switzerland and Austria ( [[#Stucki--2018|Stucki et al. 2018]] ). Government subsidies for R&amp;D have been found to greatly increase the green innovation performance of energy intensive firms in China ( [[#Bai--2019|Bai et al. 2019]] ). For more detail see Chapter 16.

Subsidies of different forms are often provided for emissions savings investments to businesses and for the retrofit of buildings for energy efficiency. Emissions reductions from energy efficiencies can often be achieved at low cost, but evidence for some schemes suggests lower effectiveness in emissions reductions than expected ''ex ante'' ( [[#Fowlie--2018|Fowlie et al. 2018]] ; [[#Valentová--2019|Valentová et al. 2019]] ). Tax credits can be used to encourage firms to produce or invest in low-carbon emission energy and low-emission equipment. Investment subsidies have been found to be more effective in reducing costs and uncertainties in solar energy technologies than production subsidies ( [[#Flowers--2016|Flowers et al. 2016]] ).

Subsidies have been provided extensively and in many countries for the deployment of household rooftop solar systems, and increasingly also for commercial scale renewable energy projects, typically using ‘feed-in tariffs’ that provide a payment for electricity generated above the market price ( [[#Pyrgou--2016|Pyrgou et al. 2016]] ). Such schemes have proven effective in deploying renewable energy, but lock-in subsidies for long periods of time. In some cases they provide subsidies at higher levels than would be required to motivate deployment ( [[#del%20Río--2014|del Río and Linares 2014]] ). High levels of net subsidies have been shown to diminish incentives for optimal siting of renewable energy installations ( [[#Penasco--2019|Penasco et al. 2019]] ).

A variant of subsidies for deployment of renewable energy are auctioned feed-in tariffs or auctioned contracts-for-difference, where commercial providers bid in a competitive process. Auctions typically lead to lower price premiums ( [[#Eberhard--2016|Eberhard and Kåberger 2016]] ; [[#Roberts--2020|Roberts 2020]] ) but efficient outcomes depend on auction design and market structure ( [[#Grashof--2020|Grashof et al. 2020]] ), although an emergent literature also questions whether spread of auctions is due to performance or the dynamics of the policy formulation process ( [[#Fitch-Roy--2019b|Fitch-Roy et al. 2019b]] ; [[#Grashof--2020|Grashof et al. 2020]] ; [[#Grashof--2021|Grashof 2021]] ). The prequalification requirements or the assessment criteria in the auctions sometimes also include local co-benefits such as local economic diversification ( [[#Buckman--2019|Buckman et al. 2019]] ; [[#White--2021|White et al. 2021]] ).

Support for rollout clean technologies at high prices can be economically beneficial in the long run if costs are reduced greatly as a function of deployment ( [[#Newbery--2018|Newbery 2018]] ). Deployment support, much of it in the form of feed-in tariffs in Germany, enabled the scaling up of the global solar photovoltaic industry and attendant large reductions in production costs that by 2020 made solar power cost competitive with fossil fuels ( [[#Buchholz--2019|Buchholz et al. 2019]] ). There is also evidence for increased innovation activity as a result of solar feed-in tariffs ( [[#Böhringer--2017b|Böhringer et al. 2017b]] ).

Many governments have also provided subsidies for the purchase of electric vehicles, including with strong effect in China ( [[#Ma--2017|Ma et al. 2017]] ), Norway ( [[#Baldursson--2021|Baldursson et al. 2021]] ) and other countries, and sometimes at relatively high rates ( [[#Kong--2019|Kong and Hardman 2019]] ).

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