The State of Clean Energy Subsidies

In a tale as old as time, governments have been providing subsidies to support businesses and provide a boost to certain industries. In a tale as old as last summer, green energy subsidies kicked into high gear after the release of the US Inflation Reduction Act (IRA), billed at a cool $394 billion.

Background: For decades, governments have been investing in new energy in order to accelerate their development.

Germany’s feed-in-tariffs for solar power in the early 2000s helped bring technology prices down significantly, a success rivalled at that time only by bringing down the price of burned CD mix tapes for your crush.

German and Chinese share of solar PV installations, 1995-2015
share of installations and costs

The green subsidy race: Since the United States rolled out the IRA, countries have scrambled to provide similar incentives and subsidies to promote their own green energy growth at home.

• In total, governments have announced ~$1.3 trillion in clean-energy subsidies since 2020, according to the International Energy Agency.

And the subsidies are working. Overall spending on clean energy is expected to reach $1.75 trillion this year, outpacing investments in fossil fuels by nearly 75 percent.

Where is the money going?

The largest sector for subsidies is low-carbon electricity, followed by mass transit, which includes charging infrastructure for EVs.

Government clean energy investment support by sector since 2020
billions USD

Things are different in the 2020s: The structure of these new subsidies differs from Germany’s solar subsidies in the 2000s. 

When Germany implemented their feed-in-tariffs, it didn’t distinguish where its solar cells came from. Countries today are incentivizing local production, many having domestic content requirements with the hopes of bolstering their energy security and churning out a new generation of manufacturing workers.

• While this will help countries build out infrastructure to support green energy, critics have warned it may lead to a wider slowdown to the global energy transition. Free-market purists see limits to free trade as reducing innovation, and emerging economies won’t be able to keep up with the clean energy investments.

And inflation: Governments are fighting rising costs, and so are heavily invested in energy affordability to keep the costs of energy low for consumers.

• Investments in energy affordability usually included offsetting the cost of fossil fuels which can arise from underinvestment.

Spending on energy affordability may soon eclipse total public investment support for clean energy.

Government spending for clean energy and energy affordability since 2020
billion USD

Affordability subsidies are particularly high for many EU countries as a result of the increased energy prices from the Russia-Ukraine war.

Zoom out: With the rise in interest rates, there are increased risks to green energy subsidies as money gets more expensive. There are also concerns about clean energy investments being overly focused domestically, as these may be less efficient than previous government subsidies.

Nonetheless, all this funding is still expected to still accelerate the green transition, but more money will have to keep flowing into this sector in order to reach global net-zero targets.