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

See all articles by Reinhard Madlener

Reinhard Madlener

RWTH Aachen University

Ilja Neustadt

RANEPA, School of Public Policy

Multiple version iconThere are 2 versions of this paper

Date Written: April 1, 2010

Abstract

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

Madlener, Reinhard and Neustadt, Ilja, Renewable Energy Policy in the Presence of Innovation: Does Government Pre-Commitment Matter? (April 1, 2010). Institute for Future Energy Consumer Needs and Behavior Working Paper No. 4/2010. Available at SSRN: https://ssrn.com/abstract=1626227 or http://dx.doi.org/10.2139/ssrn.1626227

Reinhard Madlener (Contact Author)

RWTH Aachen University ( email )

School of Business and Economics / E.ON ERC
Mathieustra├če 10
Aachen, 52074
Germany
+49 241 80 49 820 (Phone)
+49 241 80 49 829 (Fax)

HOME PAGE: http://www.eonerc.rwth-aachen.de/fcn

Ilja Neustadt

RANEPA, School of Public Policy ( email )

Moscow
Russia
+7 968 067 63 79 (Phone)

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