Critiques of renewable energy incentives
Renewable Energy (RE) technologies will play a very important role in reducing greenhouse gas emissions, but they alone will not suffice to keep climate change manageable, i.e. in the vicinity of 2°C of global temperature increase. Energy efficiency improvements have been identified as having the largest potential for energy-related carbon dioxide (CO2) emission cuts. The IEA also includes greater nuclear power deployment, as well as carbon capture and storage (CCS) technologies in its climate-friendly scenarios. The question is often raised: is it necessary or even useful to have two distinct types of policies and objectives, one series for promoting RE technologies, and another one directly addressing GHG emissions? Some economists argue that RE incentives are counterproductive when they interfere with a cap-and-trade policy such as the European Union's Emissions Trading System (EU ETS). By lowering the price of carbon, policies that support RE appear to favour more polluting forms of fossil fuels. More importantly perhaps, it is argued that CO2 prices single-handedly drive the optimal deployment of low-carbon technologies, including renewables. According to these scholars, specific renewable policies would not only be redundant but also raise the cost of climate-change mitigation.
This paper critically reviews the arguments relating to the interactions between RE and CO2 policy instruments. It shows that learning should be taken into account when assessing the long-term benefits of achieving reductions that have a high short-term cost but steep learning curve, and which hold the promise of delivering competitive climate-change options later on. Further, the risk that some other mitigation options fall short should motivate policy makers to consider higher-cost options that effectively provide insurance against catastrophic climate change.
This paper also shows that other interactions between RE deployment and climate-change mitigation policies appear through "merit-order" effects on the electricity prices in deregulated markets. These interactions open a whole set of issues relating to the long-term financing of electricity systems, a topic that warrants further research.
The "interaction" argument
In a thought-provoking paper, Bohringer and Rosendahl (2009) claim that "Green Serves the Dirtiest", through a so-called "interaction" effect. RE support policies (quotas in their model - tradeable green certificates or TGC more generally) do, as a first-order effect, reduce the profitability of "black power" (i.e. from fossil fuels), and thus reduce the output from all fossil-fuel producers. However, in a country or group of countries like the EU, where an emissions trading system (ETS) covers the CO2 emissions from electricity production, emission reductions resulting from the deployment of renewables lead to a lower CO2 price. In essence, they reduce the advantage given to efficient combined cycle gas turbines over coal plants. Emissions are not reduced further by RE incentives, as long as the quantitative cap is set once and maintained, insensitive to CO2 prices.
The model presented in Bohringer and Rosendahl actually reveals something quite different. When the emission constraint is imposed, power production by lignite power (the "dirtiest technology") decreases by 41% if no additional green quota is in place. However, when a green quota is introduced at 23% of total electricity, output from lignite power plants still decreases, but only by 31%. The "benefit for the dirtiest" is not absolute, but clearly relative - an increase of 17% over the scenario with the ETS alone. Therefore, potential investors in coal plants are still confronted with a negative outlook.
The cost-effectiveness argument
Other drivers of RE deployment policies
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