Combining Policies for Renewable Energy: Is the Whole Less than the Sum of Its Parts?

Carolyn FischerSeptember 2010 Carbon TradeEx

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Motivation for Thinking About Overlapping Renewable Policies

• Policymakers at all levels of government and around the world have been enthusiastically supporting renewable energy– Energy security – Environmental preservation – Innovation– Green jobs – Infant industries and industrial policy

• But do they recognize how policies interact?

Overlapping Policies for RES-E:Everything but the kitchen sink?

Useful Distinctionsfrom an Economic Perspective

• Fixed-price measures– Carbon – Fossil fuel taxes– Renewable subsidies

• Endogenous-price measures– Cap-and-trade– Portfolio standards– Performance standards – Credit value adjusts to other market influences

Combining Renewable Policies with a Cap-and-Trade System

• With a binding cap, zero incremental emissions reductions are realized from supplementary policies.

• RES-E subsidies cause allowance prices to fall– Tends to benefit dirtier emitters!

• i.e., coal-fired save more than natural gas-fired– Less fossil energy generation overall

• Displaced by RES-E and lower prices– None of the overlapping policies can simultaneously

disadvantage both kinds of fossil generation

Combining Policies with Tradable Standards

• A binding renewable portfolio standard links the fates of fossil and non-fossil energy

• Supplementary policies that subsidize renewables make credits cheaper– Benefits fossil energy suppliers– Expands overall consumption

• and emissions! (unless there’s also a cap)

• Additional charges on fossil energy reduce demand for renewable credits

Rationales for Overlapping PoliciesHow many tools do we need?

• Economic principle: Need as many tools as problems– If GHGs only problem, an emissions price is the only tool

needed; anything else raises costs– If RES-E share is only goal, then RPS by definition should be

efficient

• Other market failures: – R&D, learning-by-doing spillovers– Network effects– Barriers and information problems– Credit access constraints– Market power– Energy security…

Renewable Energy Policies as Innovation Policies

• Different sources have different needs– Different innovation stages,

net emissions characteristics, capital cost structures, etc.

• Simple RPSs and production subsidies do not distinguish among sources– Benefit currently commercial options; – Less effective at promoting next-generation

technology– Empirical studies find FiTs more cost-effective (OECD 2010)– Could have differentiated mandates

• Need to balance RD&D push with market pull policies

Concluding Thoughts

• Overlapping policies require overlapping problems to justify them

• Policies should be evaluated in whole context• Fixed-price policies are more transparent: Additive

• Must recognize tradeoffs between not picking winners and appropriately targeting innovation needs– To what extent do market failures vary by technologies?

• Carbon price still the single most effective policy for GHG reduction, even with spillovers

Thanks!

Funders:– Clipore Program of the Mistra Foundation– U.S. EPA Science To Achieve Results

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