Are cleantech subsidies a quiet luxury?

Move over Loro Piana, the new ways to subtly display your wealth are home renovations and a sleek new car. For the sake of carbon emissions reduction, this now qualifies the rich for government handouts. Are they having fun and saving money at the expense of people who cannot afford the upfront costs of cleaner technology?

According to a new paper by Haas School of Business researchers, 60% of the $47 billion of clean energy tax credits went to the highest earning 20% of Americans who filed taxes. These credits fund home upgrades like solar panels, heat pumps, and new cars. Subsidies for electric vehicles were even more concentrated, with the top 5% of earners receiving half of all tax credits.

Meanwhile in the UK, a Grantham Institute paper from 2020 found that people living in affluent areas benefited more from heating subsidies than those in low-income postcodes. Those in the 20% most affluent areas saved 25% on energy consumption following subsidised home upgrades like insulation and new boilers, versus just 15% savings for those living in the worst off 20% of neighbourhoods.

These subsidies are substantial. The US electric vehicle credit gave $7,500 in tax relief to buy Teslas and other battery-powered vehicles. Solar investments attract thousands of dollars per household in tax breaks. The UK’s heat pump subsidies are up to £7,500, or about a fifth of the annual median wage.

Yet to claim these subsidies is expensive. A new Tesla Model 3 cost around $40,000 between 2019 to 2021 while a heat pump requires an additional £6,500 to £11,500 alongside the subsidy. Many families cannot afford these additional costs, cannot wait until tax season to get their rebate, or are excluded from a subsidy entirely because they do not own their own home or car.

One justification for these tax breaks is that the rich consume more energy, so targeting their consumption will have more impact on emissions reduction. While this may be true, the Berkeley researchers point out that it is not immediately clear that the subsidies are driving uptake of clean technology.

Another is that the rich should be able to benefit because they pay more taxes. Whether or not you believe tax revenue should be redistributed to those who need support the most, the cost of clean technology is not limited to government subsidies. It hits everyone’s energy bills. Utilities who invest in transmission and distribution upgrades to meet the demands of heating and EV charging pass on the cost of their invested capital to customers. In the UK, clean energy subsidies are added to electricity tariffs. This can make electricity more expensive, even if you do not benefit from cleaner technologies and their energy savings.

Cleantech subsidies could have a big social impact if everyone had access to them, especially since people with low incomes tend to spend proportionally more of their household budget on energy bills. For example, policies that support rental and leasing schemes for solar panels, batteries, and appliances would allow people without up-front capital to benefit from ongoing energy savings. Unless we find ways to target these subsidies more broadly, residential cleantech investments will likely remain a hobby for the wealthy.