Emissions Reductions or Green Booms? General Equilibrium Effects of a Renewable Portfolio Standard

Abstract

Renewable portfolio standards (RPS) are commonly promoted as a policy tool to reduce emissions associated with fossil generation, while also stimulating development of local renewable resource endowments. We develop a general equilibrium model of an RPS policy that captures key features such as a fixed factor renewable endowment, substitution across sectors of the economy, and endogenous price responses. We analytically decompose the effects of an RPS into a) a substitution effect, b) an output-tax effect, and c) an output effect. We show that an increase in the RPS can either deliver large resource booms or large emissions savings but not both. Our framework can translate different renewable resource endowments and pre-existing standards across states into economic and environmental impacts to inform current renewable energy and climate policies.

Keywords: Renewable Portfolio Standards, Emissions, Resource Booms, General Equilibrium

JEL Classification: Q58, D58, Q42, Q33, Q48