J. Abrell, S. Rausch, and C. Streitberger (2019). The Economics of Renewable Energy Support. Journal of Public Economics, 176, 94-117. Working paper version is available here.
J. Abrell, M. Kosch, and S. Rausch (2019). Carbon Abatement with Renewables: Evaluating Wind and Solar Subsidies in Germany and Spain. Journal of Public Economics, 169, 172-202. Working paper version is available here.
Decarbonization of energy systems to cope with the major challenges related to fossil fuels will require drastic changes in the future mix of energy technologies in favor of using low-carbon, renewable energy (RE). While economists advocate carbon pricing (along with policies to address positive externalities related to technological innovation, diffusion, and learning), policies aimed at subsidizing the deployment of RE technologies are often considered a costly second-best option for internalizing a carbon externality. Yet, policies promoting clean energy from RE sources such as wind and solar are the most widely adopted form of actual low-carbon policy.
This study examines how inefficient optimally designed RE support strategies are in relation to carbon pricing. An RE support scheme comprises two essential elements: (1) implicit or explicit subsidies paid to RE firms (2) and a rule determining how such subsidies are financed. A generic way of thinking about what do optimal RE support schemes look like is therefore to ask how RE funding should be structured and financed.
This paper uses theoretical and numerical economic equilibrium models to examine optimal RE support policies for wind and solar resources in the presence of a carbon externality associated with the use of fossil fuels. We emphasize three main issues for policy design: the heterogeneity of intermittent natural resources, budget-neutral financing rules, and incentives for carbon mitigation. We find that differentiated subsidies for wind and solar, while being optimal, only yield negligible efficiency gains. Policies with smart financing of RE subsidies which either relax budget neutrality or use polluter-pays financing in the context of budget-neutral schemes can, however, approximate socially optimal outcomes. Our analysis suggests that optimally designed RE support policies do not necessarily have to be viewed as a costly second-best option when carbon pricing is unavailable.
A second paper uses econometric techniques which exploit the exogeneity of weather conditions to evaluate renewable energy (RE) subsidy programs in Germany and Spain in terms of their costs for reducing carbon dioxide emissions. We find that both the aggregate costs and the distribution of costs between energy producers and consumers vary significantly depending on which type of RE technology is promoted—reflecting substantial heterogeneity in production costs, temporal availability of natural resources, and market conditions (i.e., time-varying demand, carbon intensity of installed production capacities, and opportunities for cross-border trade). We estimate that the costs for reducing one ton of CO2 emissions through subsidies for solar are €411–1’944. Subsidizing wind entails significantly lower costs, ranging from €82– 276. While the economic rents for energy producers always decrease, consumers incur four to seven times larger costs when solar is promoted but gain under RE policies promoting wind.