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Demand Subsidies Versus R&D: Comparing the Uncertain Impacts of Policy on a Pre-commercial Low-carbon Energy Technology

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  • Gregory F. Nemet
  • Erin Baker

Abstract

We combine an expert elicitation and a bottom-up manufacturing cost model to compare the effects of R&D and demand subsidies. We model their effects on the future costs of a low-carbon energy technology that is not currently commercially available, purely organic photovoltaics (PV). We find that: (1) successful R&D enables PV to achieve a cost target of 4c/kWh, (2) the cost of PV does not reach the target when only subsidies, and not R&D, are implemented, and (3) production-related effects on technological advance—learning-by-doing and economies of scale—are not as critical to the long-term potential for cost reduction in organic PV than is the investment in and success of R&D. These results are insensitive to two levels of policy intensity, the level of a carbon price, the availability of storage technology, and uncertainty in the main parameters used in the model. However, a case can still be made for subsidies: comparisons of stochastic dominance show that subsidies provide a hedge against failure in the R&D program.

Suggested Citation

  • Gregory F. Nemet & Erin Baker, 2009. "Demand Subsidies Versus R&D: Comparing the Uncertain Impacts of Policy on a Pre-commercial Low-carbon Energy Technology," The Energy Journal, , vol. 30(4), pages 49-80, October.
    • Handle: RePEc:sae:enejou:v:30:y:2009:i:4:p:49-80
    DOI: 10.5547/ISSN0195-6574-EJ-Vol30-No4-2
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    More about this item

    Keywords

    Photovoltaics (PV); R&D; subsidies; climate change; technology policy; solar energy;
    All these keywords.

    JEL classification:

    • F0 - International Economics - - General

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