Emissions pricing instruments with intermittent renewables: second-best policy

Nandeeta Neerunjun ()
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Nandeeta Neerunjun: Aix-Marseille Univ, CNRS, AMSE, Marseille, France.

No 2215, AMSE Working Papers from Aix-Marseille School of Economics, France

Abstract: I analyze emissions pricing to support the integration of a renewable resource into an electricity mix composed of an emissions-intensive technology. I consider the intermittent nature of the resource such as wind energy and incremental externalities that become severe for high emissions levels. I show that an emissions tax is inefficient when consumers are on flat-rate electricity tariffs and cannot adapt their consumption to varying production. The tax is inefficient even with flexibility in the markets when consumers are on varying tariffs. The renewable resource induces variability in fossil-fueled electricity production and associated marginal damage that does not match a predetermined tax. I study an Emissions Trading Scheme that provides flexibility at the policy level. Emissions permits are traded at varying prices. Since the emissions cap must still be predetermined, I show that it leads to inefficient permits prices that do not match the marginal damages. I also find that the two emissions pricing instruments are not implemented equivalently since the tax differs from the prices of permits.

Keywords: electricity; renewables; intermittency; emissions tax; Emissions Trading Scheme (search for similar items in EconPapers)
JEL-codes: D24 D61 D62 Q41 Q42 Q48 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2022-07
New Economics Papers: this item is included in nep-ene and nep-env
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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