One of the only arguably beneficial impacts of taxing petrol as heavily as the government does is, theoretically, to encourage the production of ‘fuel-efficient’ vehicles. A tax on fuel increases its price and consumers will seek fuel-efficient alternatives to current vehicles. This increased demand has encouraged car manufacturers to develop vehicles that are more fuel-efficient. Since subsidies are the inverse of taxation, the effect of subsidising green technology on innovation is inverted.
Subsidising green technology means that producers have less incentive to continue innovating and producing even more efficient technology since the government basically favours the status quo or a particular benchmark. If we must have subsidies, this benchmark (as in, a certain level of efficiency) must be constantly revised upwards so that: 1. We don’t subsidise as many firms’ products, 2. Cash transfers to firms require constant innovation and improvement. Cutting back subsidies for fuel-efficiency and green technology in conjunction with these high fuel taxes (let’s face it, they’re not coming down anytime soon) should encourage innovation whilst tackling the budget deficit.
A similar logic applies to subsidising solar panels, wind farms etc. because the government has essentially signalled to the producers that, although their inventions are not cost-effective, the remaining burden will be imposed upon the taxpayer. This means that these alternative energy sources will not be developed to their full potential as quickly as they would otherwise be.
Why delay innovation on the basis that we are happy with what we have compared to what we used to have? Surely, we should encourage the production of new, more efficient ‘green’ energy technologies sooner rather than later; this can be achieved by cutting subsidies for existing green technologies and thereby preventing such firms from being comfortable with inefficiency.