Redistribution Effects of Energy and Climate Policy: The Electricity Market

Lion Hirth () and Falko Ueckerdt
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Falko Ueckerdt: Potsdam-Institute for Climate Impact Research

No 2012.82, Working Papers from Fondazione Eni Enrico Mattei

Abstract: Energy and climate policies are usually seen as measures to internalize externalities. However, as a side effect, these policies redistribute wealth between consumers and producers, and within these groups. While redistribution is seldom the focus of the academic literature in energy economics, it plays a central role in real world policy debates. This paper compares the redistribution effects of two major electricity policies: support schemes for renewable energy sources, and CO2 pricing. We find that the redistribution effects of both policies are large, and they work in opposed directions: while renewables support transfers wealth from producers to consumers, carbon pricing does the opposite. More specifically, we show that moderate amounts of wind subsidies leave consumers better off even if they bear the costs of subsidies. In the case of CO2 pricing, we find that while suppliers as a whole benefit even without free allocation of emission certificates, large amounts of producer surplus are redistributed between different types of producers. These findings are derived from an analytical model of electricity markets, and a calibrated numerical model of the Northwestern European integrated power system. Our findings imply that a society with a preference for avoiding large redistribution might prefer a mix of policies, even if CO2 pricing alone is the first best climate policy in terms of allocative efficiency.

Keywords: Carbon Tax; Emission Trading; Redistribution; Consumer Surplus; Producer Surplus; Wind Power Generation; Electricity Market Modelling (search for similar items in EconPapers)
JEL-codes: C61 C63 D61 D62 H23 L94 Q42 Q48 (search for similar items in EconPapers)
Date: 2012-11
New Economics Papers: this item is included in nep-cmp, nep-ene, nep-env, nep-pol and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Related works:
Journal Article: Redistribution effects of energy and climate policy: The electricity market (2013)
Working Paper: Redistribution Effects of Energy and Climate Policy: The Electricity Market (2012)
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