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Renewable energy subsidies: Second-best policy or fatal aberration for mitigation?

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  • Kalkuhl, Matthias
  • Edenhofer, Ottmar
  • Lessmann, Kai

Abstract

This paper evaluates the consequences of renewable energy policies on welfare and energy prices in a world where carbon pricing is imperfect and the regulator seeks to limit emissions to a (cumulative) target. The imperfectness of the carbon price is motivated by political concerns regarding distributional effects of increased energy prices. Hence, carbon prices are considered to be temporarily or permanently absent or endogenously constrained by their effect on energy prices. We use a global general equilibrium model with an intertemporal fossil resource sector and calculate intertemporally optimal policies from a broad set of policy instruments including carbon taxes, renewable energy subsidies and feed-in-tariffs, among others. If carbon pricing is permanently missing, mitigation costs increase by a multiple (compared to the optimal carbon pricing policy) for a wide range of parameters describing extraction costs, renewable energy costs, substitution possibilities and normative attitudes. Furthermore, we show that small deviations from the second-best subsidy can lead to strong increases in emissions and consumption losses. This confirms the rising concerns about the occurrence of unintended side effects of climate policy – a new version of the green paradox. Smart combinations of carbon prices and renewable energy subsidies, however, can achieve ambitious mitigation targets at moderate additional costs without leading to high energy price increases.

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Bibliographic Info

Article provided by Elsevier in its journal Resource and Energy Economics.

Volume (Year): 35 (2013)
Issue (Month): 3 ()
Pages: 217-234

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Handle: RePEc:eee:resene:v:35:y:2013:i:3:p:217-234

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Web page: http://www.elsevier.com/locate/inca/505569

Related research

Keywords: Carbon pricing; Carbon trust; Climate policy; Feed-in-tariff; Green paradox; Energy prices;

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References

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Citations

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Cited by:
  1. Lehmann, Paul, 2013. "Supplementing an emissions tax by a feed-in tariff for renewable electricity to address learning spillovers," Energy Policy, Elsevier, vol. 61(C), pages 635-641.
  2. Narbel, Patrick A., 2014. "Rethinking how to support intermittent renewables," Discussion Papers 2014/17, Department of Business and Management Science, Norwegian School of Economics.
  3. Edenhofer, Ottmar & Hirth, Lion & Knopf, Brigitte & Pahle, Michael & Schlömer, Steffen & Schmid, Eva & Ueckerdt, Falko, 2013. "On the economics of renewable energy sources," Energy Economics, Elsevier, vol. 40(S1), pages S12-S23.
  4. Matthias Kalkuhl & Ottmar Edenhofer & Kai Lessmann, 2012. "The Role of Carbon Capture and Sequestration Policies for Climate Change Mitigation," CESifo Working Paper Series 3834, CESifo Group Munich.
  5. Amigues, Jean-Pierre & Chakravorty, Ujjayant & Lafforgue, Gilles & Moreaux, Michel, 2012. "Renewable Portfolio Standards and implicit tax-subsidy schemes: Structural differences induced by quantity and proportional mandates," IDEI Working Papers 698, Institut d'Économie Industrielle (IDEI), Toulouse.
  6. Mark Andor & Achim Voss, 2014. "Optimal Renewable-Energy Subsidies," Ruhr Economic Papers 0473, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.

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