The Economics of Renewable Energy Support

52 Pages Posted: 10 Jan 2019

See all articles by Jan Abrell

Jan Abrell

ETH Zürich - Centre for Energy Policy and Economics (CEPE)

Sebastian Rausch

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich; Massachusetts Institute of Technology (MIT) - Joint Program on the Science and Policy of Global Change

Clemens Streitberger

ETH Zürich - Department of Management, Technology and Economics

Multiple version iconThere are 2 versions of this paper

Date Written: January 10, 2019

Abstract

This paper uses theoretical and numerical economic equilibrium models to examine optimal renewable energy (RE) support policies for wind and solar resources in the presence of a carbon externality associated with the use of fossil fuels. We emphasize three main issues for policy design: the heterogeneity of intermittent natural resources, budget-neutral financing rules, and incentives for carbon mitigation. We find that differentiated subsidies for wind and solar, while being optimal, only yield negligible efficiency gains. Policies with smart financing of RE subsidies which either relax budget neutrality or use “polluter-pays-the-price” financing in the context of budget-neutral schemes can, however, approximate socially optimal outcomes. Our analysis suggests that optimally designed RE support policies do not necessarily have to be viewed as a costly second-best option when carbon pricing is unavailable.

JEL Classification: Q28, Q42, Q52, Q58, C61

Suggested Citation

Abrell, Jan and Rausch, Sebastian and Streitberger, Clemens, The Economics of Renewable Energy Support (January 10, 2019). USAEE Working Paper No. 19-378, Available at SSRN: https://ssrn.com/abstract=3313582 or http://dx.doi.org/10.2139/ssrn.3313582

Jan Abrell

ETH Zürich - Centre for Energy Policy and Economics (CEPE) ( email )

8092 Zurich
Switzerland

Sebastian Rausch (Contact Author)

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich ( email )

Zürichbergstrasse 18
Zurich, 8092
Switzerland

Massachusetts Institute of Technology (MIT) - Joint Program on the Science and Policy of Global Change ( email )

77 Massachusetts Ave, Bldg E40-474
Cambridge, MA 02139
United States

Clemens Streitberger

ETH Zürich - Department of Management, Technology and Economics ( email )

Rämistrasse 101
ZUE F7
Zürich, 8092
Switzerland

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