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Are renewable energy policies climate friendly? The role of capacity constraints and market power

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  • Wang, Min
  • Zhao, Jinhua

Abstract

This paper studies the impacts of renewable energy support policies on energy prices, fossil fuel supply and thus carbon emissions from fossil fuels. Such supports are climate friendly if the renewables are already competitive against fossil fuels. But if the renewables are not yet competitive, the climate change impacts are often ambiguous and are sensitive to capacity constraints of renewables production and to the fossil fuel market structure. If the renewables do not have capacity constraints, then the subsidies are subject to the Green Paradox under perfect competition, but might be climate friendly under monopoly. Supports for capacity constrained renewables under perfect competition lead to more current fossil fuel supply but delay fossil fuel exhaustion time, and these effects are reversed under monopoly. Our results highlight the importance of considering the long-term effects on fossil fuel supply as well as capacity constraints and market power in designing renewable energy policies and evaluating their carbon footprints.

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  • Wang, Min & Zhao, Jinhua, 2018. "Are renewable energy policies climate friendly? The role of capacity constraints and market power," Journal of Environmental Economics and Management, Elsevier, vol. 90(C), pages 41-60.
    • Handle: RePEc:eee:jeeman:v:90:y:2018:i:c:p:41-60
    DOI: 10.1016/j.jeem.2018.05.003
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    3. Hannesson, Rögnvaldur, 2018. "The Green Paradox and learning by doing," Discussion Papers 2018/17, Norwegian School of Economics, Department of Business and Management Science.
    4. Beltrami, Filippo & Fontini, Fulvio & Grossi, Luigi, 2021. "The value of carbon emission reduction induced by Renewable Energy Sources in the Italian power market," Ecological Economics, Elsevier, vol. 189(C).
    5. Lancker, Kira & Quaas, Martin F., 2019. "Increasing marginal costs and the efficiency of differentiated feed-in tariffs," Energy Economics, Elsevier, vol. 83(C), pages 104-118.
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    7. Engelhorn, Thorsten & Müsgens, Felix, 2021. "Why is Germany’s energy transition so expensive? Quantifying the costs of wind-energy decentralisation," Resource and Energy Economics, Elsevier, vol. 65(C).
    8. Kengo Suzuki & Ryohei Ishiwata, 2022. "Impact of a Carbon Tax on Energy Transition in a Deregulated Market: A Game-Based Experimental Approach," Sustainability, MDPI, vol. 14(19), pages 1-19, October.

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    More about this item

    Keywords

    Green paradox; Capacity constraints; Market power; Carbon accounting; Climate change;
    All these keywords.

    JEL classification:

    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q38 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Government Policy (includes OPEC Policy)

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