 Interaction between CO2 emissions trading and renewable energy subsidies under uncertainty: feed-in tariffs as a safety net against over-allocationOskar Lecuyer () and Philippe Quirion Climate Policy, 2019, vol. 19, issue 8, 1002-1018 Abstract: We study the interactions between a CO2 emissions trading system (ETS) and renewable energy subsidies under uncertainty over electricity demand and energy costs. We develop an analytical model and a numerical model applied to the European Union electricity market in which renewable energy subsidies are justified only by CO2 abatement. We confirm that in this context, when uncertainty is small, renewable energy subsidies are not welfare-improving, but we show that when uncertainty is large enough, these subsidies increase expected welfare because they provide CO2 abatement even in the case of over-allocation, i.e. when the cap is higher than the emissions which would have occurred without the ETS. The source of uncertainty is important when comparing the various types of renewable energy subsidies. Under uncertainty over electricity demand, renewable energy costs or gas prices, a feed-in tariff brings higher expected welfare than a feed-in premium because it provides a higher subsidy when it is actually needed i.e. when the electricity price is low. Under uncertainty over coal prices, the opposite result holds true.Key policy insights Due to the possibility of over-allocation in an ETS, subsidies to renewable energies can increase expected welfare, even when climate change mitigation is the only benefit from renewables taken into account.In most cases studied, a feed-in tariff brings a higher expected welfare than a feed-in premium.The European Commission guidelines on State aid for energy, which incentivize member States to replace feed-in tariffs by feed-in premiums, should be reconsidered based on these results. Date: 2019 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:taf:tcpoxx:v:19:y:2019:i:8:p:1002-1018 Ordering information: This journal article can be ordered from DOI: 10.1080/14693062.2019.1625743 Access Statistics for this article Climate Policy is currently edited by Professor Michael Grubb More articles in Climate Policy from Taylor & Francis Journals |
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