Do renewable energy policies reduce carbon emissions? On caps and inter-industry leakage

Johannes Jarke and Grischa Perino

Journal of Environmental Economics and Management, 2017, vol. 84, issue C, 102-124

Abstract: In a parsimonious two-sector general equilibrium model, we challenge the widely-held tenet that within a cap-and-trade system renewable energy policies have no effect on carbon emissions. If the cap does not capture all sectors, we demonstrate that variations of a renewable energy subsidy change aggregate carbon emissions through an inter-industry leakage effect. We decompose this effect into intuitively intelligible components that depend in natural ways on measurable elasticity parameters. Raising the subsidy always reduces emissions if funded by a lump-sum tax, reinforcing recent findings that tightening environmental regulation can cause negative leakage. However, if the subsidy is funded by a levy on electricity, it can increase emissions. These results provide a valuable basis for an informed design of renewable energy policies and an accurate assessment of their effectiveness. We highlight how a state-of-the-art statistic used by governments to gauge such effectiveness, “virtual emission reductions”, is biased, because inter-industrial leakage effects are not captured.

Keywords: D58; H23; K32; Q48; Q54; Q58; Cap-and-tradeOverlapping instrumentsLeakageRenewable energyClimate policyFeed-in tariffGeneral equilibrium (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (39)

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Working Paper: Do Renewable Energy Policies Reduce Carbon Emissions? On Caps and Inter-Industry Leakage (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeeman:v:84:y:2017:i:c:p:102-124

DOI: 10.1016/j.jeem.2017.01.004

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