In the last few years, governments have increasingly introduced subsidies across industries in order to enable a transition towards sustainable energy. Total energy subsidies in the EU amounted to €176 billion in 2019. Phasing out of coal from electricity generation has been incentivised by plant closure subsidies in many Member States. Renewable energy received a total of €78 billion in subsidies, up by 8% since 2015.

Using concepts from the module, briefly discuss the rationale for these interventions. In a first-best situation where pollution is the only market imperfection, what information should be collected in order to introduce the most efficient subsidy? What are other possible factors should governments take into account when pursuing a more realistic second-best solution?