An Integrated Framework for Analyzing Technology Subsidies

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Subsidies are among the many tools available to policy makers as they consider how best to support consumer adoption and producer innovation of new technologies, but accounting for the major effects of subsidies can be problematic for some technologies. For example, despite a long history of subsidizing energy technologies such as renewable electricity sources, biofuels, and efficient lighting and appliances, the analytical basis for evaluating the effects of subsidies on these technologies is not yet firmly established. Prior assessments of energy technology subsidies employed one of two analytical perspectives; the analysis either: (i) compared subsidy costs to the monetized environmental benefits resulting from increased consumer adoption of the technology, but ignored the subsidy's impact on technology evolution; or (ii) examined the subsidy's impact on the market competitiveness of technology producers, including future technology innovations, but ignored the environmental benefits. Both perspectives contribute valuable insights, but neither perspective fully accounts for the range of subsidy costs and benefits, and policy prescriptions based on either perspective in isolation are necessarily limited. By combining the two analytical perspectives within a single integrated framework, this project will allow us to estimate and compare the long-run net effects of alternative forms of technology subsidies on consumer adoption, producer innovation, and the resultant benefits. The research will apply the framework to estimate the net effects of different subsidy trajectories (types, levels, and timing of subsidies) for particular emerging technologies -- including electric cars, solar photovoltaics, and wind power. The results will advance understanding of environmental policy, technology innovation policy, and quantitative policy analysis. The major product of this research, the integrated analytical framework, can be used to inform policy decisions about which technologies to subsidize, the level and timing of subsidy support, and other policy-relevant questions. The framework is flexible: it is immediately applicable to the analysis of subsidies for new technologies in other industries, and could also be extended to study forms of intervention other than subsidies.The integrated framework comprises three types of models. An adoption model, using actual price and technology sales data, forecasts consumer adoption of the technology as a function of the consumer's subsidy-adjusted investment in the technology. A technological progress model, based on experience-curve methods and actual cost/experience data for comparable technologies, forecasts technology cost reductions that result from accumulated consumer adoption of the technology, and isolates the cost reductions attributable to the subsidy. An emissions model, using data developed by the environmental economics and life-cycle emissions research communities, converts units of technology adoption into estimates of emissions reduction, and converts estimated emissions reductions into estimates of monetized social benefit. The integration of these models produces estimates of the time-discounted net effects of a technology subsidy that account for the subsidy cost in relation to: (i) the direct environmental benefits (monetized emissions reductions) from consumer adoption of the technology, and (ii) the indirect innovation-related benefits derived from technical improvements, stimulated by the subsidy, that yield additional consumer adoption and benefits in the future.This award reflects NSF's statutory mission and has been deemed worthy of support through evaluation using the Foundation's intellectual merit and broader impacts review criteria.