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Designing More Cost-effective Trading Markets for Renewable Energy

Author

Listed:
  • Jose Miguel Abito
  • Felipe Flores-Golfin
  • Andrew J. Hinchberger
  • Arthur A. van Benthem
  • Gabrielle Vasey

Abstract

In this paper we study the design of renewable energy portfolio standards (RPSs). We focus on solar energy and analyze two common RPS rules: cross-state trading restrictions and state-specific interim annual targets. Using historically observed RPSs and an empirically calibrated model of state-level solar supply curves, we find that allowing for cross-state trading reduces cost by one-fifth and significantly changes the geographic distribution of new solar installations. Removing interim annual targets over the 2015 to 2019 period reduces cost by one-third by back-loading installations to later years. These cost reductions become much larger when considering more ambitious RPS targets. Our results suggest that more flexible program design such as allowing for cross-state trading, back-loading interim targets, or banking and borrowing renewable energy credits can avoid escalating costs and preserve the political feasibility of renewable energy standards, although such cost savings must be balanced against the social damages from delayed climate action and other economic and political considerations. JEL Classification: H23, Q41, Q42, Q48

Suggested Citation

  • Jose Miguel Abito & Felipe Flores-Golfin & Andrew J. Hinchberger & Arthur A. van Benthem & Gabrielle Vasey, 2025. "Designing More Cost-effective Trading Markets for Renewable Energy," The Energy Journal, , vol. 46(4), pages 227-252, July.
    • Handle: RePEc:sae:enejou:v:46:y:2025:i:4:p:227-252
    DOI: 10.1177/01956574251328253
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    References listed on IDEAS

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    1. Jonathan E. Hughes & Molly Podolefsky, 2015. "Getting Green with Solar Subsidies: Evidence from the California Solar Initiative," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 2(2), pages 235-275.
    2. Jacquelyn Pless & Arthur A. van Benthem, 2019. "Pass-Through as a Test for Market Power: An Application to Solar Subsidies," American Economic Journal: Applied Economics, American Economic Association, vol. 11(4), pages 367-401, October.
    3. Don Fullerton & Chi L. Ta, 2025. "What Determines Effectiveness of Renewable Energy Standards? General Equilibrium Analytical Model and Empirical Analysis," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 12(1), pages 65-103.
    4. Yanjun Liao, 2020. "Weather and the Decision to Go Solar: Evidence on Costly Cancellations," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 7(1), pages 1-33.
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    More about this item

    Keywords

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    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

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