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Addressing multiple externalities from electricity generation: a case for EU renewable energy policy beyond 2020?

Paul Lehmann, Jos Sijm, Erik Gawel, Sebastian Strunz, Unnada Chewpreecha, Jean-Francois Mercure () and Hector Pollitt
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Jos Sijm: ECN part of TNO, Energy Transition Studies
Erik Gawel: Helmholtz Centre for Environmental Research-UFZ
Sebastian Strunz: Helmholtz Centre for Environmental Research-UFZ
Unnada Chewpreecha: Cambridge Econometrics
Hector Pollitt: Cambridge Econometrics

Environmental Economics and Policy Studies, 2019, vol. 21, issue 2, No 4, 255-283

Abstract: Abstract Subsidies to electricity generation from renewable energy sources (RES-E) implemented next to an emissions trading scheme (ETS) are frequently criticised for producing no additional benefit in terms of mitigating climate change and increasing the costs of emissions abatement. We re-assess the performance of this policy mix in a setting in which electricity generation produces multiple externalities (beyond climate change) and in which these externalities cannot be addressed by first-best policies. Using an analytical partial equilibrium model, we show that the optimal composition of the policy mix depends on the market interactions between the multiple externalities. We complement this analysis by a quantitative policy assessment, combining a top-down, global macro-economic model and a bottom-up, global electricity sector model. The quantitative analysis suggests that RES-E subsidies may be effective in partly reducing externalities from fossil fuel combustion (by crowding out gas- and oil-fired generation) and in mitigating radiation hazards (by crowding out nuclear generation). However, RES-E subsidies are not necessarily suited to address externalities related to the extraction and transportation of fossil fuels or risks of sudden supply interruptions for imported fuels. With respect to these latter externalities, tightening the ETS cap may be a more effective, but politically less feasible approach.

Keywords: Climate policy; Electricity; Emissions trading; EU; Externalities; Policy mix; Renewables (search for similar items in EconPapers)
JEL-codes: C53 Q42 Q43 Q48 Q54 Q58 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1007/s10018-018-0229-6

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Handle: RePEc:spr:envpol:v:21:y:2019:i:2:d:10.1007_s10018-018-0229-6