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Interaction between CO2 emissions trading and renewable energy subsidies under uncertainty: feed-in tariffs as a safety net against over-allocation

Author

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  • Oskar Lecuyer

    (OCCR,University of Bern)

  • Philippe Quirion

    (CNRS, CIRED)

Abstract

We study the interactions between a CO2 emissions trading system (ETS) and renewable energy subsidies under uncertainty over electricity demand and energy costs. We first provide evidence that uncertainty has generated over-allocation (defined as an emissions cap above business-as-usual emissions) during at least part of the history of most ETSs in the world. We then develop an analytical model and a numerical model applied to the European Union electricity market in which renewable energy subsidies are justified only by CO2 abatement. We show that in this context, when uncertainty is small, renewable energy subsidies are not justified, but when it is big enough, these subsidies increase expected welfare because they provide CO2 abatement even in the case of over-allocation. The source of uncertainty is important when comparing the various types of renewable energy subsidies. Under uncertainty over electricity demand, renewable energy costs or gas prices, a feed-in tariff brings higher expected welfare than a feed-in premium because it provides a higher subsidy when it is actually needed i.e. when the electricity price is low. Under uncertainty over coal prices, the opposite result holds true. These results shed new light on the ongoing switch from feed-in tariffs to feed-in premiums in Europe.

Suggested Citation

  • Oskar Lecuyer & Philippe Quirion, 2016. "Interaction between CO2 emissions trading and renewable energy subsidies under uncertainty: feed-in tariffs as a safety net against over-allocation," Policy Papers 2016.03, FAERE - French Association of Environmental and Resource Economists.
  • Handle: RePEc:fae:ppaper:2016.03
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    References listed on IDEAS

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    Cited by:

    1. Egli, Philipp & Lecuyer, Oskar, 2017. "Quantifying the net cost of a carbon price floor in Germany," Energy Policy, Elsevier, vol. 109(C), pages 685-693.
    2. Liu, Da & Liu, Yumeng & Sun, Kun, 2021. "Policy impact of cancellation of wind and photovoltaic subsidy on power generation companies in China," Renewable Energy, Elsevier, vol. 177(C), pages 134-147.
    3. Yu, Vincent F. & Le, Thi Huynh Anh & Gupta, Jatinder N.D., 2023. "Sustainable microgrid design with peer-to-peer energy trading involving government subsidies and uncertainties," Renewable Energy, Elsevier, vol. 206(C), pages 658-675.
    4. Wei, Wei & Hu, Haiqing & Chang, Chun-Ping, 2022. "Why the same degree of economic policy uncertainty can produce different outcomes in energy efficiency? New evidence from China," Structural Change and Economic Dynamics, Elsevier, vol. 60(C), pages 467-481.
    5. Liu, Ying & Feng, Chao, 2023. "Promoting renewable energy through national energy legislation," Energy Economics, Elsevier, vol. 118(C).
    6. Bian, Junsong & Zhang, Guoqing & Zhou, Guanghui, 2020. "Manufacturer vs. Consumer Subsidy with Green Technology Investment and Environmental Concern," European Journal of Operational Research, Elsevier, vol. 287(3), pages 832-843.
    7. Xu, Xiaofeng & Cui, Xiaodan & Chen, Xiangyu & Zhou, Yichen, 2022. "Impact of government subsidies on the innovation performance of the photovoltaic industry: Based on the moderating effect of carbon trading prices," Energy Policy, Elsevier, vol. 170(C).
    8. Perrier, Quentin, 2017. "The French Nuclear Bet," ESP: Energy Scenarios and Policy 256058, Fondazione Eni Enrico Mattei (FEEM).
    9. Philippe Quirion, 2020. "Les "instruments de marché" dans la lutte contre le changement climatique : quel bilan après 20 ans ?," Post-Print hal-03100296, HAL.
    10. Adams, Samuel & Adedoyin, Festus & Olaniran, Eniola & Bekun, Festus Victor, 2020. "Energy consumption, economic policy uncertainty and carbon emissions; causality evidence from resource rich economies," Economic Analysis and Policy, Elsevier, vol. 68(C), pages 179-190.
    11. Quentin Perrier, 2017. "The French nuclear bet," CIRED Working Papers halshs-01487296, HAL.
    12. Donia Aloui & Brahim Gaies & Rafla Hchaichi, 2023. "Exploring environmental degradation spillovers in Sub-Saharan Africa: the energy–financial instability nexus," Economic Change and Restructuring, Springer, vol. 56(3), pages 1699-1724, June.
    13. Ruhnau, O. & Bucksteeg, M. & Ritter, D. & Schmitz, R. & Böttger, D. & Koch, M. & Pöstges, A. & Wiedmann, M. & Hirth, L., 2022. "Why electricity market models yield different results: Carbon pricing in a model-comparison experiment," Renewable and Sustainable Energy Reviews, Elsevier, vol. 153(C).
    14. Stefano Clo' & Gianluca Iannucci & Alessandro Tampieri, 2024. "Emission permits and firms' environmental responsibility," Working Papers - Economics wp2024_06.rdf, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.
    15. Tsao, Yu-Chung & Thanh, Vo-Van & Chang, Yi-Ying & Wei, Hsi-Hsien, 2021. "COVID-19: Government subsidy models for sustainable energy supply with disruption risks," Renewable and Sustainable Energy Reviews, Elsevier, vol. 150(C).
    16. Perrier, Quentin, 2018. "The second French nuclear bet," Energy Economics, Elsevier, vol. 74(C), pages 858-877.

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    More about this item

    Keywords

    Willingness to pay; Social capital; Environmental protection; Ordered logistic regression; Sweden;
    All these keywords.

    JEL classification:

    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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