The Carbon Incidence of Cross-Subsidies: A Dividend and a Squeeze

Résumé

Electricity subsidies to the poor are widely treated as environmentally costly: cheaper power raises consumption and emissions. We show the opposite can hold, and trace it to the incidence of the subsidy’s financing. Brazil’s 2022 automatic enrolment into the Tarifa Social de Energia Elétrica (TSEE) sorts households into a subsidised base and a paying base – the wealthy plus an administratively excluded ”backlog” – financed by a volumetric surcharge. Because the paying base is price-responsive, the surcharge suppresses its consumption by more than the recipients’ rebound; at the thermal margin, aggregate emissions fall. The sign of this carbon dividend is a sufficient statistic, independent of the marginal emissions factor. Its magnitude, which we estimate, is modest: the wealthy respond chiefly by adopting rooftop solar – already cheaper than the grid, though they stay connected on a residual load – while their grid price response is slight. Nor is the dividend durable. As solar diffuses the wealthy adopt it in growing numbers – exogenously, paced by falling solar costs rather than driven out by the surcharge – and, because the surcharge funds a development account that itself subsidises solar, each adopter both erodes the paying base and raises the funding requirement: a squeeze whose burden falls on the captive poor. We identify the demand elasticities and household solar adoption and embed them in a model of the break-even surcharge. The environmental value of a cross-subsidy turns on whose demand its financing suppresses – and, as the outside option cheapens, on who is left to pay. co-authored with Claudio Lucinda – University of Sao Paulo)