Green Subsidies Could Deliver the Same Climate Impact at Half the Cost

Governments worldwide rely on targeted investment subsidies to accelerate the adoption of green technologies and reduce carbon emissions. A growing body of economic theory argues that such subsidies can play an important role in climate policy, particularly when carbon pricing alone is politically or practically constrained.

But these theories typically assume that public decision-makers are both able and willing to allocate subsidies to the projects that generate the greatest emissions reductions. New research from Ingvil Gaarder, assistant professor at the University of Chicago Harris School of Public Policy, and her co-authors reveals that assumption to be faulty. Using detailed data from Norway, the authors find that policymakers don’t always behave this way and that the same emissions reductions could have been achieved at less than half the cost.

The researchers examine Norway’s main green investment subsidy program, Enova SF, between 2012 and 2023, drawing on unusually rich administrative data track both expected and actual carbon emission reductions for each project being subsidized. By combining these data with a model of subsidy allocation, the authors distinguish between projects that just clear the funding cutoff and those clearly strong enough to be funded regardless—an essential step for assessing efficiency that is often missing in evaluations of climate policy. This approach allows them not only to test for misallocation, but also to measure its magnitude.

The results point to substantial “green waste.” The authors find that decision-makers could have achieved the same level of emissions reductions at less than half the cost by reallocating funds across projects and programs. Returns vary widely across subsidy programs, and in many cases fall below what could be achieved through alternative climate policies, such as purchasing and retiring emissions permits.

"By reallocating existing funds, governments could achieve dramatically larger emissions reductions without spending more,” Gaarder said. “That makes the design of subsidy allocation rules just as important as the size of climate budgets themselves."

Crucially, the study shows that this misallocation is not primarily driven by uncertainty or forecasting errors. In fact, decision-makers are able, at the time funding decisions are made, to identify the projects that will ultimately deliver the largest emissions reductions. The evidence suggests that subsidies are often steered away from these high-impact projects for reasons unrelated to emissions outcomes. These could be program-specific priorities or other non-emissions objectives embedded in the allocation process.

"Our results show that the problem isn’t that policymakers can’t tell which projects will deliver large emissions reductions, because they can,” Gaarder said. “The problem is that those projects often aren’t the ones that get funded."

The paper offers a clear framework for improving the design of green investment subsidies. The authors show that evaluating marginal (rather than average) returns is essential for identifying misallocation. Policymakers can benchmark subsidy programs against alternative climate policies to assess whether public funds are being used effectively.

“If governments want green subsidies to deliver real climate impact, they need a common yardstick,” Gaarder said. “Setting a uniform minimum rate of return—based on the opportunity cost of public funds—would go a long way toward reducing waste and ensuring that subsidies flow to the projects that actually cut emissions the most.”

The potential savings are substantial. Even in a small, wealthy country like Norway, green subsidy programs operate at a multi-billion-kroner scale, meaning inefficiencies can represent hundreds of millions in foregone climate impact. Across large, advanced economies, public funding for clean energy—from direct subsidies to tax credits—totals tens to hundreds of billions of dollars each year, and government support for clean energy investment since 2020 approaches trillions around the globe.

Gaarder’s co-authors on the study are Morten Grindaker (Statistics Norway), Tom G. Meling (The Ohio State University), and Magne Mogstad (University of Chicago and NBER).