Renewable Energy Policy in the Presence of Innovation: Does Government Pre-Commitment Matter?
Institute for Future Energy Consumer Needs and Behavior Working Paper No. 4/2010
46 Pages Posted: 17 Jun 2010
Date Written: April 1, 2010
In a perfectly competitive market with a possibility of technological innovation we contrast guaranteed feed-in tariffs for electricity from renewables and tradable green certificates from a dynamic efficiency and social welfare point of view. Specifically, we model decisions about the technological innovation with convex costs within the framework of a game-theoretic model, and discuss implications for optimal policy design under different assumptions regarding regulatory pre-commitment. We find that for the case of technological innovation with convex costs subsidy policies are preferable over quota-based policies. Further, in terms of dynamic efficiency, no pre-commitment policies are shown to be at least as good as the pre-commitment ones. Thus, a government with a preference for innovation being performed if the achievable cost reduction is high should be in favor of the no pre-commitment regime.
Keywords: Renewable Electricity, Feed-In Tariffs, Regulatory Pre-Commitment, Tradable Green Certificates, Quota Target, Innovation, Energy Policy
JEL Classification: Q42, Q48
Suggested Citation: Suggested Citation