Effectiveness of renewable energy subsidies in a CO2 intensive electricity system

Aimilia Pattakou and Aryestis Vlahakis ()
Additional contact information
Aryestis Vlahakis: ETH Zurich, Switzerland

No 18/295, CER-ETH Economics working paper series from CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich

Abstract: Can subsidies to renewable energy effectively internalise CO2 costs in electricity production? Under current policy design it only matters that the replaced energy is dirty, but not how dirty it is. We use a modified peak-load pricing model, including variable renewable generators and the external costs of carbon, to examine the way in which a unit subsidy to variable renewables cannot restore first best optimum. In our model, electricity is generated using a combination of three technology types: two dispatchable, thermal, and CO2 emitting technologies, differing in their emission intensity, and a non-dispatchable renewable technology. We show that available wind capacity is never idle, and derive equations determining optimal installed capacities for all technologies. We then describe the mechanism by which a subsidy that does not discriminate between dirty energies fails to restore first best. Our analysis highlights the importance of a carbon price: even one below the social cost of carbon could have a corrective effect on the merit order of fossil fuels and improve the effectiveness of a subsidy.

Keywords: Energy policy; Renewable energy; Environmental subsidy (search for similar items in EconPapers)
JEL-codes: H23 Q42 Q48 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2018-08
New Economics Papers: this item is included in nep-ene, nep-env and nep-reg
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.ethz.ch/content/dam/ethz/special-inter ... papers/WP-18-295.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not found UA (https://www.ethz.ch/content/dam/ethz/special-interest/mtec/cer-eth/cer-eth-dam/documents/working-papers/WP-18-295.pdf [301 Moved Permanently]--> https://ethz.ch/content/dam/ethz/special-interest/mtec/cer-eth/cer-eth-dam/documents/working-papers/WP-18-295.pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eth:wpswif:18-295

Access Statistics for this paper

More papers in CER-ETH Economics working paper series from CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich Contact information at EDIRC.
Bibliographic data for series maintained by ().