Redistribution Effects of Energy and Climate Policy: The Electricity Market
Energy and climate policies are usually seen as measures to internalize externalities. However, as a side effect, these policies redistribute wealth between consumers and producers, and within these groups. While redistribution is seldom the focus of the academic literature in energy economics, it plays a central role in real world policy debates. This paper compares the redistribution effects of two major electricity policies: support schemes for renewable energy sources, and CO2 pricing. We find that the redistribution effects of both policies are large, and they work in opposed directions: while renewables support transfers wealth from producers to consumers, carbon pricing does the opposite. More specifically, we show that moderate amounts of wind subsidies leave consumers better off even if they bear the costs of subsidies. In the case of CO2 pricing, we find that while suppliers as a whole benefit even without free allocation of emission certificates, large amounts of producer surplus are redistributed between different types of producers. These findings are derived from an analytical model of electricity markets, and a calibrated numerical model of the Northwestern European integrated power system. Our findings imply that a society with a preference for avoiding large redistribution might prefer a mix of policies, even if CO2 pricing alone is the first best climate policy in terms of allocative efficiency.
|Date of creation:||Nov 2012|
|Date of revision:|
|Contact details of provider:|| Postal: Corso Magenta, 63 - 20123 Milan|
Web page: http://www.feem.it/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Tsao, C.-C. & Campbell, J.E. & Chen, Yihsu, 2011. "When renewable portfolio standards meet cap-and-trade regulations in the electricity sector: Market interactions, profits implications, and policy redundancy," Energy Policy, Elsevier, vol. 39(7), pages 3966-3974, July.
- DeCarolis, Joseph F. & Keith, David W., 2006. "The economics of large-scale wind power in a carbon constrained world," Energy Policy, Elsevier, vol. 34(4), pages 395-410, March.
- Gil, Hugo A. & Gomez-Quiles, Catalina & Riquelme, Jesus, 2012. "Large-scale wind power integration and wholesale electricity trading benefits: Estimation via an ex post approach," Energy Policy, Elsevier, vol. 41(C), pages 849-859.
- Bushnell, James, 2010.
"Building Blocks: Investment in Renewable and Non-Renewable Technologies,"
Staff General Research Papers Archive
31546, Iowa State University, Department of Economics.
- James Bushnell, 2011. "Building Blocks: Investment in Renewable and Nonrenewable Technologies," RSCAS Working Papers 2011/53, European University Institute.
- O'Mahoney, Amy & Denny, Eleanor, 2011. "The Merit Order Effect of Wind Generation on the Irish Electricity Market," MPRA Paper 56043, University Library of Munich, Germany.
- Bode, Sven, 2006. "Multi-period emissions trading in the electricity sector--winners and losers," Energy Policy, Elsevier, vol. 34(6), pages 680-691, April.
- Hirth, Lion, 2013.
"The market value of variable renewables,"
Elsevier, vol. 38(C), pages 218-236.
- Jos Sijm & Karsten Neuhoff & Yihsu Chen, 2006.
"CO 2 cost pass-through and windfall profits in the power sector,"
Taylor & Francis Journals, vol. 6(1), pages 49-72, January.
- Sijm, J. & Neuhoff, K. & Chen, Y., 2006. "CO2 cost pass through and windfall profits in the power sector," Cambridge Working Papers in Economics 0639, Faculty of Economics, University of Cambridge.
- 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.
- Timothy D. Mount, Surin Maneevitjit, Alberto J. Lamadrid, Ray D. Zimmerman, and Robert J. Thomas, 2012.
"The Hidden System Costs of Wind Generation in a Deregulated Electricity Market,"
The Energy Journal,
International Association for Energy Economics, vol. 0(Number 1).
- Mount, Timothy D. & Maneevitjit, Surin & Lamadrid, Alberto J. & Zimmerman, Ray D. & Thomas, Robert J., 2011. "The Hidden System Costs Of Wind Generation In A Deregulated Electricity Market," Working Papers 126529, Cornell University, Department of Applied Economics and Management.
- Carolyn Fischer, 2010. "Renewable Portfolio Standards: When Do They Lower Energy Prices?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 101-120.
- Rathmann, M., 2007. "Do support systems for RES-E reduce EU-ETS-driven electricity prices?," Energy Policy, Elsevier, vol. 35(1), pages 342-349, January.
- Richard Green & Nicholas Vasilakos, 2011. "The Long-term Impact of Wind Power on Electricity Prices and Generating Capacity," Discussion Papers 11-09, Department of Economics, University of Birmingham.
- Lamont, Alan D., 2008. "Assessing the long-term system value of intermittent electric generation technologies," Energy Economics, Elsevier, vol. 30(3), pages 1208-1231, May.
- Dallas Burtraw & Karen Palmer, 2008. "Compensation rules for climate policy in the electricity sector," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 27(4), pages 819-847.
- Olsina, Fernando & Roscher, Mark & Larisson, Carlos & Garces, Francisco, 2007. "Short-term optimal wind power generation capacity in liberalized electricity markets," Energy Policy, Elsevier, vol. 35(2), pages 1257-1273, February.
- Burtraw, Dallas & Palmer, Karen & Bharvirkar, Ranjit & Paul, Anthony, 2002.
"The Effect on Asset Values of the Allocation of Carbon Dioxide Emission Allowances,"
dp-02-15-, Resources For the Future.
- Burtraw, Dallas & Palmer, Karen & Bharvirkar, Ranjit & Paul, Anthony, 2002. "The Effect on Asset Values of the Allocation of Carbon Dioxide Emission Allowances," The Electricity Journal, Elsevier, vol. 15(5), pages 51-62, June.
- Munksgaard, Jesper & Morthorst, Poul Erik, 2008. "Wind power in the Danish liberalised power market--Policy measures, price impact and investor incentives," Energy Policy, Elsevier, vol. 36(10), pages 3940-3947, October.
- Ueckerdt, Falko & Hirth, Lion & Luderer, Gunnar & Edenhofer, Ottmar, 2013. "System LCOE: What are the costs of variable renewables?," Energy, Elsevier, vol. 63(C), pages 61-75.
- Yihsu Chen & Jos Sijm & Benjamin Hobbs & Wietze Lise, 2008. "Implications of CO 2 emissions trading for short-run electricity market outcomes in northwest Europe," Journal of Regulatory Economics, Springer, vol. 34(3), pages 251-281, December.
- Richard Green, 2005. "Electricity and Markets," Oxford Review of Economic Policy, Oxford University Press, vol. 21(1), pages 67-87, Spring.
- Unger, Thomas & Ahlgren, Erik O., 2005. "Impacts of a common green certificate market on electricity and CO2-emission markets in the Nordic countries," Energy Policy, Elsevier, vol. 33(16), pages 2152-2163, November.
- Karsten Neuhoff & Stefan Bach & Jochen Diekmann & Martin Beznoska & Tarik El-Laboudy, 2013. "Distributional Effects of Energy Transition: Impacts of Renewable Electricity Support in Germany," Economics of Energy & Environmental Policy, International Association for Energy Economics, vol. 0(Number 1).
- Keats, K. Martinez & Neuhoff, K., 2004.
"Allocation of Carbon Emission Certificates in the Power Sector: How generators profit from grandfathered rights,"
Cambridge Working Papers in Economics
0444, Faculty of Economics, University of Cambridge.
- Kim Keats Martinez & Karsten Neuhoff, 2005. "Allocation of carbon emission certificates in the power sector: how generators profit from grandfathered rights," Climate Policy, Taylor & Francis Journals, vol. 5(1), pages 61-78, January.
- Lion Hirth & Inka Ziegenhagen, 2013. "Control Power and Variable Renewables A Glimpse at German Data," Working Papers 2013.46, Fondazione Eni Enrico Mattei.
- Sensfuß, Frank & Ragwitz, Mario & Genoese, Massimo, 2008. "The merit-order effect: A detailed analysis of the price effect of renewable electricity generation on spot market prices in Germany," Energy Policy, Elsevier, vol. 36(8), pages 3076-3084, August.
- MacCormack, John & Hollis, Aidan & Zareipour, Hamidreza & Rosehart, William, 2010. "The large-scale integration of wind generation: Impacts on price, reliability and dispatchable conventional suppliers," Energy Policy, Elsevier, vol. 38(7), pages 3837-3846, July.
- Sáenz de Miera, Gonzalo & del Rio González, Pablo & Vizcaino, Ignacio, 2008. "Analysing the impact of renewable electricity support schemes on power prices: The case of wind electricity in Spain," Energy Policy, Elsevier, vol. 36(9), pages 3345-3359, September.
When requesting a correction, please mention this item's handle: RePEc:fem:femwpa:2012.82. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (barbara racah)
If references are entirely missing, you can add them using this form.