Interaction between CO 2 emissions trading and renewable energy subsidies under uncertainty: feed-in tariffs as a safety net against over-allocation

Oskar Lecuyer and Philippe Quirion
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Oskar Lecuyer: AFD - Agence française de développement

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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.

Keywords: ETS; renewable energy; feed-in tariff; feed-in premium; policy interaction; uncertainty; Emissions trading (search for similar items in EconPapers)
Date: 2019-06-14
Note: View the original document on HAL open archive server: https://hal.science/hal-04431209v1
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Citations: View citations in EconPapers (1)

Published in Climate Policy, 2019, 19 (8), pp.1002-1018. ⟨10.1080/14693062.2019.1625743⟩

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Related works:
Journal Article: Interaction between CO2 emissions trading and renewable energy subsidies under uncertainty: feed-in tariffs as a safety net against over-allocation (2019)
Working Paper: Interaction between CO2 emissions trading and renewable energy subsidies under uncertainty: feed-in tariffs as a safety net against over-allocation (2016)
Working Paper: Interaction between CO2 emissions trading and renewable energy subsidies under uncertainty: feed-in tariffs as a safety net against over-allocation (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04431209

DOI: 10.1080/14693062.2019.1625743

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