Are Renewable Quotas Effective to Reduce CO2 Emissions?

28 Pages Posted: 3 Mar 2012 Last revised: 18 May 2012

See all articles by Alexander Galetovic

Alexander Galetovic

Universidad Adolfo Ibáñez; Stanford University - The Hoover Institution on War, Revolution and Peace; University of Padua - CRIEP

Cristián Hernández

Universidad de los Andes, Chile

Cristián M. Muñoz

affiliation not provided to SSRN

Luz María Neira

Universidad de los Andes, Chile - School of Economics and Managerial Sciences; Universidad de los Andes, Chile

Date Written: May 16, 2012

Abstract

We quantify the intertemporal impact of a renewable quota on CO2 emissions, pollution and welfare. We find that the quota substitutes investments in base load technologies. Therefore, its environmental benefit depends on the emission intensity factors of base load technologies, not on system average emission intensity factors. In many systems hydro is the technology that expands with base load demand and then renewable quotas have little impact on emissions and pollution.

We also find that quotas can be quite expensive and their impact is highly nonlinear. With detailed data on Chile’s system we estimate that a 5% quota is not binding, a 10% quota causes a small deadweight loss but a 20% quota multiplies the deadweight loss by a factor of 55, to about 7% of the system's supply cost. A renewable quota also rises the price paid by consumers and, with a 10% quota, they lose the equivalent to 3% of the system’s cost; with a 20% quota the loss rises by a factor of 5, equivalent to 16% of the system’s supply cost.

Ricardian rents obtained by renewables’ generators are substantial. With a 10% quota they earn a rent which is equivalent to about 3% of the system’s cost of supply. With a 20% quota, Ricardian rents increase about four times, to about 12% of the system’s supply cost.

Keywords: renewable energy, energy policy, environmental economic assessment

JEL Classification: Q58, L94, L98, L51

Suggested Citation

Galetovic, Alexander and Hernández, Cristián and Muñoz, Cristián M. and Neira, Luz María, Are Renewable Quotas Effective to Reduce CO2 Emissions? (May 16, 2012). Available at SSRN: https://ssrn.com/abstract=2014711 or http://dx.doi.org/10.2139/ssrn.2014711

Alexander Galetovic (Contact Author)

Universidad Adolfo Ibáñez ( email )

Peñalolén
Santiago
Chile

Stanford University - The Hoover Institution on War, Revolution and Peace ( email )

Stanford, CA 94305-6010
United States

University of Padua - CRIEP ( email )

Padua
Italy

Cristián Hernández

Universidad de los Andes, Chile ( email )

San Carlos de Apoquindo 2200
Santiago
Chile
+56/2/6181431 (Phone)

Cristián M. Muñoz

affiliation not provided to SSRN ( email )

Luz María Neira

Universidad de los Andes, Chile - School of Economics and Managerial Sciences ( email )

Chile

Universidad de los Andes, Chile ( email )

Mons. Álvaro del Portillo
Las Condes
Santiago, 12.455
Chile

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