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Many believe that the overlapping of CO2 and RE policy instruments increases the costs of achieving the CO2 objective. This argument follows a strong logic: the more expensive mitigation achieved through RE displaces reductions that the ETS would achieve at a lower cost. In cases where RE would be driven by the CO2 price alone and RE incentives were to persist, the additional support only creates windfall profits.

The exact extent of the additional cost of RE support in achieving a given CO2 objective is difficult to evaluate. It depends on the cost of the promoted RE sources and the amount of CO2 they avoid, and on the cost of avoiding the same quantities through measures that would have been mobilised, had renewables not been promoted. Electricity generation from renewables is particularly challenging: it requires an assessment of the CO2 content of the kWh they displace, which depends on the merit order (i.e. the last production capacity required to fulfil the demand at every moment). These elements typically differ from one country to the next. This difficulty, however, does not make the point any less valid.1 The cost-effectiveness argument is often part of the broader argument that climate policies should be technology-neutral, for governments are not good at "picking winners".

Supporting RE incentives

Various arguments can be made in response to the criticism of specific RE incentives when a broader CO2 policy is in place. This paper considers the following:

F Climate change mitigation is only one among many motives behind the promotion of renewables.

F Climate change is a long-term issue. It may be optimal to implement higher-cost options together with lower-cost options, if the deployment of the former has the potential to reduce the longer-term costs of mitigation.

1 A fuller investigation of the short-term effects of these interactions would necessitate assessing the macro-economic effects of CO2 prices and changes in electricity prices. If RE deployment were required to achieve the short-term CO2 objectives (I.e. if no cheaper options were left out), having a specific RE incentive could help keep the CO2 and electricity prices lower, and lower their macro-economic effect. As the modelling by Böhringen and Rosendhal suggests, this is probably not the case today. But if their short-term assessment holds in the current context, it may not always hold.

The support to renewables may have various drivers other than climate mitigation. These include 1) a contribution to the reduction of other pollutants and related risks arising from the use of other energy sources; 2) a contribution to increased energy security, reduced dependence on imported fossil fuels; 3) hedging against price volatility and long-term price increase of fossil fuels; 3) and a willingness to develop local employment, sometimes reinforced by the perception of the first mover's advantage.

These arguments are valid. Renewable technology deployment offers many benefits beyond its contribution to climate change mitigation, which need to be assessed and valued. However, they may fall short of justifying the extra cost. For instance, RE may substitute for less costly CO2 mitigation options that produce similar benefits, or some of them.

With respect to CO2 emissions from fossil fuel combustion, possible emission reductions can come from energy efficiency improvements, fuel switching to fuels with lower carbon content (usually from coal to natural gas in electricity production), nuclear or renewable, or carbon capture and storage. It is important to consider how these options fare relative to the other objectives possibly attributed to the policies supporting RE deployment.

Energy efficiency improvements contribute as much or perhaps more than RE to all the objectives assigned to RE policies. They reduce other pollution, increase energy security, and often create local jobs (e.g. for home insulation).

Fuel switching may or may not contribute to increased energy security, depending on the resources of the country considered, and its relationships to exporting countries. It usually reduces other pollution along with CO2 emissions - burning natural gas usually entails lower NOx, SOx, heavy metals and particulate emissions than burning coal.

Carbon capture and storage increases fuel consumption, and thus does not provide any hedge against price volatility and long-term price increase. It may, nevertheless, increase energy security in a carbon-constrained world for countries with coal resources (or even without, considering a possible diversification in fuels and providers). It captures and stores most atmospheric pollutants as well as CO2.

Nuclear power does not emit CO2 and the other pollutants generally associated with fossil-fuel burning. Although nuclear raw fuels must often be imported, their share in the overall cost is much smaller than in the case of fossil fuels, and the diversification of fuels and exporting countries lessens energy security risks.

Another aspect often overlooked in assessing policies with multiple objectives is that other means can often be employed to achieve each objective individually. For example, while it is legitimate to account for the reduction of particulate, SOx or NOx emissions when renewable energy substitutes for some fossil-fuel burning, one must also consider other possibilities (and associated costs) to reduce the same emissions. This could be achieved through cleaning the fuel, using low-NOx burners or end-of-pipe devices such as filters, scrubbers, flue-gas desulphurisation and others.

As a result, the multiplicity of objectives pursued with policy instruments specifically supporting the deployment of RE technologies may fall short of fully justifying them if the analysis remains focused on short-term effects - especially when they displace energy efficiency improvements.

The need for a longer-term perspective

The interactions between RE and CO2 policy instruments are likely to increase the cost of achieving the CO2 target set for the relatively short term. However, climate change mitigation extends far beyond the relatively short-term perspective in which CO2 targets were set.

Climate change is a very long-term issue. The Fourth Assessment report of the Inter-governmental Panel on Climate Change offers emissions ranges for categories of stabilisation scenarios from 2000 to 2100 (IPCC, 2007). Mitigation efforts will need to extend over this entire century and maybe beyond.

It is widely acknowledged that deep cuts in emissions will require a broad portfolio of mitigation options. The IEA World Energy Outlook2010 (IEA, 2010a), suggests that by 2035 energy efficiency improvements above the baseline would provide 47% of the CO2 emission reductions in the 450 scenario; additional renewable and biofuels 24%; carbon dioxide capture and storage 19%; and additional nuclear power plants 8%.

The IEA Energy Technology Perspectives 2010 (IEA, 2010b) shows that by 2050 renewable energy sources will provide about half the global electricity (Figure 1). The BLUE Map Scenario charts a path to a reduction in global energy-related CO2 emissions by 50% from 2005 levels at the lowest possible overall cost. The High Renewable variant of the BLUE Map Scenario suggests that, if nuclear, CCS or energy efficiency improvements were to fall short, or if deeper cuts in CO2 emissions were warranted, RE sources could provide up to 75% of global electricity by 2050, with an increase in the costs of electricity of about 10%.

The necessary large-scale deployment of low-carbon energy technologies in the coming decades will result from significant cost reductions and a price on CO2. The costs of deploying CCS technologies or concentrating solar electricity are divided by four from current levels; the cost of photovoltaic (PV) modules by six; and the cost of fuel cells for vehicles by an even greater figure. The costs of associated CO2 emissions reductions with respect to the baseline scenario can be reduced even more. For example, when renewable energy technologies become fully competitive, the marginal cost of associated emission reductions falls to zero.

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