Do Renewable Energy Policies Reduce Carbon Emissions? On Caps and Inter-Industry Leakage

Posted: 5 May 2017

See all articles by Johannes Jarke-Neuert

Johannes Jarke-Neuert

University of Hamburg - Center for Earth System Research and Sustainability (CEN)

Grischa Perino

University of Hamburg

Date Written: January 25, 2017

Abstract

In a parsimonious two-sector general equilibrium model, we challenge the widely-held tenet that within a cap-and-trade system renewable energy policies have no effect on carbon emissions. If the cap does not capture all sectors, we demonstrate that variations of a renewable energy subsidy change aggregate carbon emissions through an inter-industry leakage effect. We decompose this effect into intuitively intelligible components that depend in natural ways on measurable elasticity parameters. Raising the subsidy always reduces emissions if funded by a lump-sum tax, reinforcing recent findings that tightening environmental regulation can cause negative leakage. However, if the subsidy is funded by a levy on electricity, it can increase emissions. These results provide a valuable basis for an informed design of renewable energy policies and an accurate assessment of their effectiveness. We highlight how a state-of-the-art statistic used by governments to gauge such effectiveness, “virtual emission reductions”, is biased, because inter-industrial leakage effects are not captured.

Keywords: Cap-And-Trade, Overlapping Instruments, Leakage, Renewable Energy, Climate Policy, Feed-In Tariff, General Equilibrium

JEL Classification: D58, H23, K32, Q48, Q54, Q58

Suggested Citation

Jarke-Neuert, Johannes and Perino, Grischa, Do Renewable Energy Policies Reduce Carbon Emissions? On Caps and Inter-Industry Leakage (January 25, 2017). Journal of Environmental Economics and Management, Vol. 84, 2017, Available at SSRN: https://ssrn.com/abstract=2962846

Johannes Jarke-Neuert (Contact Author)

University of Hamburg - Center for Earth System Research and Sustainability (CEN) ( email )

Bundesstrasse 53
Hamburg, Hamburg 20146
Germany

Grischa Perino

University of Hamburg ( email )

Welckerstr. 8
Hamburg, 20354
Germany

HOME PAGE: http://sites.google.com/site/gperinosite/

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