Question

The Energy and Environment Minister has asked you to advise her on promoting “green power.” She has been given a proposal to offer a 1/c per kWh subsidy to green power. You suggest that she should instead impose a 1/c per kWh tax on power that isn’t green. She says that the cost advantage of green power is the same either way, but taxes are harder to sell politically. You still argue for the tax. Why? (Max 100 words)

Answer 1

The argument in favor of the tax can be explained as follows:

• A tax generates government revenue, while a subsidy requires government expenditure
• In the attempt to move people towards green power, the initial challenge is to reduce the consumption of conventional sources of energy. This reduction is possible only by imposing a tax. A subsidy doesn't guarantee that people will move towards green power.
• It is possible that by subsidizing green energy, the prices of conventional sources of energy may actually fall due to a fall in their demand; while on the other hand, there is an increase in supply of green energy. These effects may prove counter productive.
• A subsidy in one sector has to be funded by a tax in another sector - thus eliminating any real benefits. This may lead to unemployment, inflation and loss of output in the other sector.
• A reasonably large tax on conventional sources of energy, like oil and coal, will directly impact their prices and usage. Firms will be forced to move to greener sources. The tax revenue thus generated, can be used for many other useful goals.

Thus, a tax is a direct and more effective tool.