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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

Listed:
  • 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

    as
    1. Ralf Martin & Mirabelle Muûls & Ulrich J. Wagner, 2016. "The Impact of the European Union Emissions Trading Scheme on Regulated Firms: What Is the Evidence after Ten Years?," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 10(1), pages 129-148.
    2. Robert Marschinski & Philippe Quirion, 2014. "Tradable Renewable Quota vs. Feed-In Tariff vs. Feed-In Premium under Uncertainty," Working Papers 2014.99, Fondazione Eni Enrico Mattei.
    3. Richard Schmalensee & Robert N. Stavins, 2013. "The SO 2 Allowance Trading System: The Ironic History of a Grand Policy Experiment," Journal of Economic Perspectives, American Economic Association, vol. 27(1), pages 103-122, Winter.
    4. Dressler, Luisa, 2016. "Support schemes for renewable electricity in the European Union: Producer strategies and competition," Energy Economics, Elsevier, vol. 60(C), pages 186-196.
    5. Christoph Böhringer & Knut Rosendahl, 2010. "Green promotes the dirtiest: on the interaction between black and green quotas in energy markets," Journal of Regulatory Economics, Springer, vol. 37(3), pages 316-325, June.
    6. Meredith Fowlie & Stephen P. Holland & Erin T. Mansur, 2012. "What Do Emissions Markets Deliver and to Whom? Evidence from Southern California's NOx Trading Program," American Economic Review, American Economic Association, vol. 102(2), pages 965-993, April.
    7. Bel, Germà & Joseph, Stephan, 2015. "Emission abatement: Untangling the impacts of the EU ETS and the economic crisis," Energy Economics, Elsevier, vol. 49(C), pages 531-539.
    8. Brigitte Knopf & Nicolas Koch & Godefroy Grosjean & Sabine Fuss & Christian Flachsland & Michael Pahle & Michael Jakob & Ottmar Edenhofer, 2014. "The European Emissions Trading System (EU ETS): Ex-Post Analysis, the Market Stability Reserve and Options for a Comprehensive Reform," Working Papers 2014.79, Fondazione Eni Enrico Mattei.
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    Cited by:

    1. repec:eee:enepol:v:109:y:2017:i:c:p:685-693 is not listed on IDEAS
    2. Quentin Perrier, 2017. "The French nuclear bet," Policy Papers 2017.01, FAERE - French Association of Environmental and Resource Economists.
    3. Quentin Perrier, 2017. "The French nuclear bet," CIRED Working Papers halshs-01487296, HAL.
    4. Quentin Perrier, 2017. "The French Nuclear Bet," Working Papers 2017.18, Fondazione Eni Enrico Mattei.
    5. Quentin Perrier, 2017. "The French Nuclear Bet," ESP: Energy Scenarios and Policy 256058, Fondazione Eni Enrico Mattei (FEEM).

    More about this item

    Keywords

    Willingness to pay; Social capital; Environmental protection; Ordered logistic regression; Sweden;

    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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