Renewable energy subsidies: Second-best policy or fatal aberration for mitigation?

Matthias Kalkuhl, Ottmar Edenhofer and Kai Lessmann

Resource and Energy Economics, 2013, vol. 35, issue 3, 217-234

Abstract: This paper evaluates the consequences of renewable energy policies on welfare and energy prices in a world where carbon pricing is imperfect and the regulator seeks to limit emissions to a (cumulative) target. The imperfectness of the carbon price is motivated by political concerns regarding distributional effects of increased energy prices. Hence, carbon prices are considered to be temporarily or permanently absent or endogenously constrained by their effect on energy prices. We use a global general equilibrium model with an intertemporal fossil resource sector and calculate intertemporally optimal policies from a broad set of policy instruments including carbon taxes, renewable energy subsidies and feed-in-tariffs, among others. If carbon pricing is permanently missing, mitigation costs increase by a multiple (compared to the optimal carbon pricing policy) for a wide range of parameters describing extraction costs, renewable energy costs, substitution possibilities and normative attitudes. Furthermore, we show that small deviations from the second-best subsidy can lead to strong increases in emissions and consumption losses. This confirms the rising concerns about the occurrence of unintended side effects of climate policy – a new version of the green paradox. Smart combinations of carbon prices and renewable energy subsidies, however, can achieve ambitious mitigation targets at moderate additional costs without leading to high energy price increases.

Keywords: Carbon pricing; Carbon trust; Climate policy; Feed-in-tariff; Green paradox; Energy prices (search for similar items in EconPapers)
JEL-codes: D58 H21 Q4 Q52 Q54 Q58 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (102)

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Related works:
Working Paper: Renewable Energy Subsidies: Second-Best Policy or Fatal Aberration for Mitigation? (2011)
Working Paper: Renewable Energy Subsidies: Second-Best Policy or Fatal Aberration for Mitigation? (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:resene:v:35:y:2013:i:3:p:217-234

DOI: 10.1016/j.reseneeco.2013.01.002

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