Italy Attempts to Move Beyond Boom and Bust

The Italian government recently announced plans to implement a carbon tax to fund clean energy and steadily reduce solar subsidies, yet another promising example of energy innovation at the international level – ITIF has previously looked at innovative policies in the UK and Demark. Coincidentally, the news from Italy also came at roughly the same time of the release of a report, Beyond Boom & Bust: Putting Clean Tech on a Path to Subsidy Independence, co-authored by experts from the Breakthrough Institute, the Brookings Institution, and the World Resources Institute, which calls for comprehensive policy reform to encourage clean energy innovation and wean the industry off subsidies. While the two events are not directly related, this much is clear: Italy is attempting to avoid a clean tech boom-and-bust cycle in real-time and think about clean energy innovation for the long term.

Although an Italian carbon tax is only in the planning stage, its theoretical structure is very promising. According to the Italian government, the tax’s revenues would be devoted to funding clean energy projects. In that way, the tax mirrors the structure of ITIF’s proposed “innovation carbon price”, which would recycle roughly 83 percent of tax revenues back to the economy in the form of growth and innovation inducing business tax incentives, with the remaining 17 percent or so of revenues going towards a Clean Energy Innovation Trust Fund that would support clean energy innovation initiatives. Of course, both Italy’s potential carbon tax and ITIF’s proposed innovation carbon price would achieve the Boom & Bust recommendation of “increase[ing] investment in RD&D… to both invent new technologies and improve the cost and performance of existing ones to make them more competitive with conventional energy sources.”

The Italian government is also planning to reduce its solar feed-in-tariff (FIT), a policy mechanism which provides producers with long-term compensation contracts. Italy’s solar market has boomed since the introduction of the subsidy in 2007, with the country behind only Germany, Spain, and Japan at the end of 2010 in terms of installed solar power capacity. Nevertheless, a November 2011 KPMG report suggested that while the FIT has been instrumental to sector growth, it is fiscally unsustainable – which is why the Italian government first reduced the FIT last year. There were concerns at the time that the policy change would devastate the solar industry, but that has not been the case in the intervening year. 2011 actually saw Italy overtake Germany as the annual leader in new solar PV installation. In that vein, an April 2012 Jefferies & Company report finds that while solar installations will decline this year as a result of the new proposed FIT reduction, “demand may be more stable long term”, with the law ultimately being “a longer term positive as it is economically more sustainable” and favors “relying less on…subsidy”. As the level of further potential reductions in 2013 will be dependent on the rate of solar installations, Italy’s moves to change its FIT almost follow another Boom & Bust recommendation to the letter: “Deployment incentives should decline as technologies improve in price and performance to both conserve limited taxpayer and consumer resources and provide clear incentives for continued technology improvement.”

Hopefully, Italy’s new carbon tax and FIT reforms will help foster innovation to the point that its clean energy industry is cost-competitive with fossil fuels without relying on subsidies. In the meantime, other countries would be well-served by building on the Italian experience to ensure long-term, vibrant clean energy industries of their own.

The Palazzo Montecitorio, the seat of the Italian Chamber of Deputies, is displayed in the above picture.