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The Impact of Carbon Prices on Renewable Energy Support

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  • Jan Abrell
  • Mirjam Kosch

Abstract

We examine how optimal renewable energy (RE) support policies need to be adjusted to account for carbon prices. We show theoretically and empirically that changing carbon prices requires adjusting RE subsidies due to two motives. First, RE premiums need to be reduced to reflect the carbon value embedded in the market price. Second, once a coal to gas switch occurs, RE premiums and feed-in tariffs need to be adjusted to account for changes in the marginal external benefit of RE. We use empirical estimations and numerical simulation models to quantify these effects for the United Kingdom. We show that the second effect is empirically small, whereas the first effect requires to completely phase-out RE premiums with increasing carbon prices. Finally, a fuel switch increases solar-induced abatement, whereas wind-induced abatement is rather invariant to a fuel switch. Yet, the differentiation of optimal subsidies between wind and solar power is modest.

Suggested Citation

  • Jan Abrell & Mirjam Kosch, 2022. "The Impact of Carbon Prices on Renewable Energy Support," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 9(3), pages 531-563.
    • Handle: RePEc:ucp:jaerec:doi:10.1086/717417
    DOI: 10.1086/717417
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    Cited by:

    1. Keppler, Jan Horst & Quemin, Simon & Saguan, Marcelo, 2022. "Why the sustainable provision of low-carbon electricity needs hybrid markets," Energy Policy, Elsevier, vol. 171(C).

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    More about this item

    JEL classification:

    • 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
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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