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Renewable Energy Policy in the Presence of Innovation: Does Government Pre-Commitment Matter?

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  • Madlener, Reinhard

    ()
    (E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN))

  • Neustadt, Ilja

    ()
    (Socioeconomic Institute (SOI), Faculty of Economics, University of Zurich)

Abstract

In a perfectly competitive market with a possibility of technological innovation we contrast guaranteed feed-in tariffs for electricity from renewables and tradable green certificates from a dynamic efficiency and social welfare point of view. Specifically, we model decisions about the technological innovation with convex costs within the framework of a game-theoretic model, and discuss implications for optimal policy design under different assumptions regarding regulatory pre-commitment. We find that for the case of technological innovation with convex costs subsidy policies are preferable over quota-based policies. Further, in terms of dynamic efficiency, no pre-commitment policies are shown to be at least as good as the pre-commitment ones. Thus, a government with a preference for innovation being performed if the achievable cost reduction is high should be in favor of the no pre-commitment regime.

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Bibliographic Info

Paper provided by E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN) in its series FCN Working Papers with number 4/2010.

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Length: 40 pages
Date of creation: Apr 2010
Date of revision: Jun 2010
Handle: RePEc:ris:fcnwpa:2010_004

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Keywords: Renewable Electricity; Feed-In Tariffs; Regulatory Pre-Commitment; Tradable Green Certificates; Quota Target; Innovation; Energy Policy;

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  1. Amundsen, Eirik S. & Mortensen, Jorgen Birk, 2001. "The Danish Green Certificate System: some simple analytical results," Energy Economics, Elsevier, vol. 23(5), pages 489-509, September.
  2. Nielsen, Lene & Jeppesen, Tim, 2003. "Tradable Green Certificates in selected European countries--overview and assessment," Energy Policy, Elsevier, vol. 31(1), pages 3-14, January.
  3. Amundsen, Eirik S. & Nese, Gjermund, 2002. "Provision of renewable energy using green certificates: market power and price limits," MPRA Paper 10558, University Library of Munich, Germany.
  4. Amundsen, E.S. & Mortensen, J.B., 2001. "The Danish Green Certificate System: Some Simple Analytical Results," Norway; Department of Economics, University of Bergen 226, Department of Economics, University of Bergen.
  5. Weiyu Gao & Reinhard Madlener & Peter Zweifel, 2005. "Promoting renewable electricity generation in imperfect markets: price vs. quantity control," CEPE Working paper series 05-45, CEPE Center for Energy Policy and Economics, ETH Zurich.
  6. Nilsson, Mats & Sundqvist, Thomas, 2007. "Using the market at a cost: How the introduction of green certificates in Sweden led to market inefficiencies," Utilities Policy, Elsevier, vol. 15(1), pages 49-59, March.
  7. Söderholm, Patrik, 2008. "The political economy of international green certificate markets," Energy Policy, Elsevier, vol. 36(6), pages 2051-2062, June.
  8. Berry, David, 2002. "The market for tradable renewable energy credits," Ecological Economics, Elsevier, vol. 42(3), pages 369-379, September.
  9. Weitzman, Martin L, 1978. "Optimal Rewards for Economic Regulation," American Economic Review, American Economic Association, vol. 68(4), pages 683-91, September.
  10. Soderholm, Patrik & Sundqvist, Thomas, 2003. "Pricing environmental externalities in the power sector: ethical limits and implications for social choice," Ecological Economics, Elsevier, vol. 46(3), pages 333-350, October.
  11. Menanteau, Philippe & Finon, Dominique & Lamy, Marie-Laure, 2003. "Prices versus quantities: choosing policies for promoting the development of renewable energy," Energy Policy, Elsevier, vol. 31(8), pages 799-812, June.
  12. Pizer, William A., 1999. "The optimal choice of climate change policy in the presence of uncertainty," Resource and Energy Economics, Elsevier, vol. 21(3-4), pages 255-287, August.
  13. Denicolo, Vincenzo, 1999. "Pollution-Reducing Innovations under Taxes or Permits," Oxford Economic Papers, Oxford University Press, vol. 51(1), pages 184-99, January.
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Cited by:
  1. Bernstein, Ronald & Madlener, Reinhard, 2011. "Responsiveness of Residential Electricity Demand in OECD Countries: A Panel Cointegation and Causality Analysis," FCN Working Papers 8/2011, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
  2. Kraas, Birk & Schroedter-Homscheidt, Marion & Pulvermüller, Benedikt & Madlener, Reinhard, 2011. "Economic Assessment of a Concentrating Solar Power Forecasting System for Participation in the Spanish Electricity Market," FCN Working Papers 12/2011, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
  3. Michelsen, Carl Christian & Madlener, Reinhard, 2011. "Homeowners' Preferences for Adopting Residential Heating Systems: A Discrete Choice Analysis for Germany," FCN Working Papers 9/2011, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
  4. Reinhard Madlener & Weiyu Gao & Ilja Neustadt & Peter Zweifel, 2008. "Promoting renewable electricity generation in imperfect markets: price vs. quantity policies," SOI - Working Papers 0809, Socioeconomic Institute - University of Zurich.
  5. Michele Sennhauser, 2009. "Why the Linear Utility Function is a Risky Choice in Discrete-Choice Experiments," SOI - Working Papers 1014, Socioeconomic Institute - University of Zurich.

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