Introduction

Presidents Ford and Carter's warnings in the 1970s on US dependence on foreign oil and Gore's warnings today on climate change have the same policy implication — move towards a low carbon economy. This is because carbon dioxide is the most important anthropogenic greenhouse gas (GHG) and its increasing concentration in the atmosphere since the pre-industrial period is primarily due to fossil fuel use. In this respect, the international climate protection regime reflected in the UN Framework Convention on Climate Change and especially its Kyoto Protocol points in two directions — discourage fossil fuel subsidies and promote energy efficiency and renewable energy (RE) sources (Inferred from Kyoto Article 2.1.a (iv) and (v)).

From a pure theoretical economic viewpoint, subsidisation might not be the best way to promote renewables. Most economists would prefer to apply a proper taxation system which takes into account all environmental externalities related to fossil fuels. On a global level, an economically plausible cap and trade system may also be a way to achieve this. The lack of political consensus behind these ‘market-based instruments’, however, has led policy-makers to devise various domestic incentive schemes to promote renewables. Such schemes include subsidies among other regulatory schemes such as feed-in tariffs. Their primary aim is to level the playing field between conventional and renewable energy sources, currently obstructed by the relatively high costs of RE technologies and also to some extent by subsidies on fossil fuels.