How should one encourage to use of alternative energy sources? There are essentially two market based means: subsidizing the good sources, and taxing the bad ones. So what would be optimal to do?
Essentially, the goal is to create a price wedge between good and bad, so that consumers are encouraged to choose more frequently good energy sources. So at first sight, taxing or subsidizing does not make a difference. However, subsidizing has several drawbacks. First, as the average price of energy decreases, the overall use of energy increases, which may be an unintended consequence. Second, the subsidy must be financed with some other revenue, which is typically through some distortionary taxation that generates a deadweight loss.
Thus: tax fossil fuels, do not subsidize renewable energies. Use the revenue to offset distortionary taxes.
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