IDEAS home Printed from https://ideas.repec.org/a/ucp/jaerec/doi10.1086-717417.html
   My bibliography  Save this article

The Impact of Carbon Prices on Renewable Energy Support

Author

Listed:
  • Jan Abrell
  • Mirjam Kosch

Abstract

We examine how optimal renewable energy (RE) support policies need to be adjusted to account for carbon prices. We show theoretically and empirically that changing carbon prices requires adjusting RE subsidies due to two motives. First, RE premiums need to be reduced to reflect the carbon value embedded in the market price. Second, once a coal to gas switch occurs, RE premiums and feed-in tariffs need to be adjusted to account for changes in the marginal external benefit of RE. We use empirical estimations and numerical simulation models to quantify these effects for the United Kingdom. We show that the second effect is empirically small, whereas the first effect requires to completely phase-out RE premiums with increasing carbon prices. Finally, a fuel switch increases solar-induced abatement, whereas wind-induced abatement is rather invariant to a fuel switch. Yet, the differentiation of optimal subsidies between wind and solar power is modest.

Suggested Citation

  • Jan Abrell & Mirjam Kosch, 2022. "The Impact of Carbon Prices on Renewable Energy Support," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 9(3), pages 531-563.
    • Handle: RePEc:ucp:jaerec:doi:10.1086/717417
    DOI: 10.1086/717417
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1086/717417
    Download Restriction: Access to the online full text or PDF requires a subscription.
    File URL: http://dx.doi.org/10.1086/717417
    Download Restriction: Access to the online full text or PDF requires a subscription.
    File URL: https://libkey.io/10.1086/717417?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Duncan S. Callaway & Meredith Fowlie & Gavin McCormick, 2018. "Location, Location, Location: The Variable Value of Renewable Energy and Demand-Side Efficiency Resources," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 5(1), pages 39-75.
    2. Abrell, Jan & Weigt, Hannes, 2008. "The Interaction of Emissions Trading and Renewable Energy Promotion," MPRA Paper 65658, University Library of Munich, Germany.
    3. Abrell, Jan & Rausch, Sebastian & Streitberger, Clemens, 2019. "The economics of renewable energy support," Journal of Public Economics, Elsevier, vol. 176(C), pages 94-117.
    4. Jan Abrell & Mirjam Kosch & Sebastian Rausch, 2017. "The Economic Cost of Carbon Abatement with Renewable Energy Policies," CER-ETH Economics working paper series 17/273, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
    5. Abrell, Jan & Rausch, Sebastian & Streitberger, Clemens, 2019. "Buffering volatility: Storage investments and technology-specific renewable energy support," Energy Economics, Elsevier, vol. 84(S1).
    6. Jan Abrell & Mirjam Kosch & Sebastian Rausch, 2019. "How Effective Was the UK Carbon Tax? — A Machine Learning Approach to Policy Evaluation," CER-ETH Economics working paper series 19/317, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
    7. J. Scott Holladay and Steven Soloway, 2016. "The Environmental Impacts of Fuel Switching Electricity Generators," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4).
    8. Mar Reguant, 2014. "Complementary Bidding Mechanisms and Startup Costs in Electricity Markets," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 81(4), pages 1708-1742.
    9. Holladay, J. Scott & LaRiviere, Jacob, 2017. "The impact of cheap natural gas on marginal emissions from electricity generation and implications for energy policy," Journal of Environmental Economics and Management, Elsevier, vol. 85(C), pages 205-227.
    10. Christoph Böhringer & Manuela Behrens, 2015. "Interactions of emission caps and renewable electricity support schemes," Journal of Regulatory Economics, Springer, vol. 48(1), pages 74-96, August.
    11. Harrison Fell & Daniel T. Kaffine, 2018. "The Fall of Coal: Joint Impacts of Fuel Prices and Renewables on Generation and Emissions," American Economic Journal: Economic Policy, American Economic Association, vol. 10(2), pages 90-116, May.
    12. Erin T. Mansur, 2008. "Measuring Welfare in Restructured Electricity Markets," The Review of Economics and Statistics, MIT Press, vol. 90(2), pages 369-386, May.
    13. Daniel T. Kaffine & Brannin J. McBee & Jozef Lieskovsky, 2013. "Emissions Savings from Wind Power Generation in Texas," The Energy Journal, , vol. 34(1), pages 155-176, January.
    14. World Bank, "undated". "State and Trends of Carbon Pricing 2020 [Situación y tendencias de la fijación del precio al carbono 2020]," World Bank Publications - Reports 33809, The World Bank Group.
    15. Stefan Lamp & Mario Samano, 2023. "(Mis)allocation of Renewable Energy Sources," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 10(1), pages 195-229.
    16. Kevin Novan, 2015. "Valuing the Wind: Renewable Energy Policies and Air Pollution Avoided," American Economic Journal: Economic Policy, American Economic Association, vol. 7(3), pages 291-326, August.
    17. Christoph Böhringer & Knut Rosendahl, 2010. "Green promotes the dirtiest: on the interaction between black and green quotas in energy markets," Journal of Regulatory Economics, Springer, vol. 37(3), pages 316-325, June.
    18. Joseph A. Cullen & Erin T. Mansur, 2017. "Inferring Carbon Abatement Costs in Electricity Markets: A Revealed Preference Approach Using the Shale Revolution," American Economic Journal: Economic Policy, American Economic Association, vol. 9(3), pages 106-133, August.
    19. Pablo del Río González, 2007. "The interaction between emissions trading and renewable electricity support schemes. An overview of the literature," Mitigation and Adaptation Strategies for Global Change, Springer, vol. 12(8), pages 1363-1390, October.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Keppler, Jan Horst & Quemin, Simon & Saguan, Marcelo, 2022. "Why the sustainable provision of low-carbon electricity needs hybrid markets," Energy Policy, Elsevier, vol. 171(C).
    2. Romano, E. & Mutschler, R. & Hollmuller, P. & Sulzer, M. & Orehounig, K. & Rüdisüli, M., 2024. "Spatial carbon and price spillovers among EU countries on their pathway toward net-zero electricity supply," Energy Economics, Elsevier, vol. 131(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Gugler, Klaus & Haxhimusa, Adhurim & Liebensteiner, Mario, 2023. "Carbon pricing and emissions: Causal effects of Britain's carbon tax," Energy Economics, Elsevier, vol. 121(C).
    2. Rivera, Nathaly M. & Ruiz-Tagle, J. Cristobal & Spiller, Elisheba, 2024. "The health benefits of solar power generation: Evidence from Chile," Journal of Environmental Economics and Management, Elsevier, vol. 126(C).
    3. LaRiviere, Jacob & Lyu, Xueying, 2022. "Transmission constraints, intermittent renewables and welfare," Journal of Environmental Economics and Management, Elsevier, vol. 112(C).
    4. Brehm, Paul, 2019. "Natural gas prices, electric generation investment, and greenhouse gas emissions," Resource and Energy Economics, Elsevier, vol. 58(C).
    5. John J. García Rendón & Alex F. Pérez-Libreros, 2019. "El precio spot de la electricidad y la inclusión de energía renovable no convencional: evidencia para Colombia," Documentos de Trabajo de Valor Público 17393, Universidad EAFIT.
    6. Perez, Alex & Garcia-Rendon, John J., 2021. "Integration of non-conventional renewable energy and spot price of electricity: A counterfactual analysis for Colombia," Renewable Energy, Elsevier, vol. 167(C), pages 146-161.
    7. Chu, Yin & Gao, Juanxia & Li, Haoyang, 2023. "Wind power expansion and regional allocative efficiency among fossil-fuel electricity generators," International Journal of Industrial Organization, Elsevier, vol. 91(C).
    8. Klaus Gugler & Adhurim Haxhimusa & Mario Liebensteiner, 2019. "Effective Climate Policy Doesn’t Have to be Expensive," Department of Economics Working Papers wuwp293, Vienna University of Economics and Business, Department of Economics.
    9. Harding, Matthew & Kettler, Kyle & Lamarche, Carlos & Ma, Lala, 2023. "The (alleged) environmental and social benefits of dynamic pricing," Journal of Economic Behavior & Organization, Elsevier, vol. 205(C), pages 574-593.
    10. Harrison Fell & Daniel T. Kaffine, 2018. "The Fall of Coal: Joint Impacts of Fuel Prices and Renewables on Generation and Emissions," American Economic Journal: Economic Policy, American Economic Association, vol. 10(2), pages 90-116, May.
    11. Stefan Lamp & Mario Samano, 2023. "(Mis)allocation of Renewable Energy Sources," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 10(1), pages 195-229.
    12. Steven M. Smith, 2019. "The Relative Economic Merits of Alternative Water Rights," Working Papers 2019-08, Colorado School of Mines, Division of Economics and Business.
    13. Cullen, Joseph A. & Reynolds, Stanley S., 2023. "Market dynamics and investment in the electricity sector," International Journal of Industrial Organization, Elsevier, vol. 89(C).
    14. Fell, Harrison & Linn, Joshua, 2013. "Renewable electricity policies, heterogeneity, and cost effectiveness," Journal of Environmental Economics and Management, Elsevier, vol. 66(3), pages 688-707.
    15. Brittany Tarufelli & Ben Gilbert, 2019. "Leakage in Regional Climate Policy? Implications of Electricity Market Design," Working Papers 2019-07, Colorado School of Mines, Division of Economics and Business, revised Dec 2021.
    16. Brett Watson & Ian Lange & Joshua Linn, 2023. "Coal demand, market forces, and U.S. coal mine closures," Economic Inquiry, Western Economic Association International, vol. 61(1), pages 35-57, January.
    17. Stephen P. Holland & Erin T. Mansur & Nicholas Z. Muller & Andrew J. Yates, 2020. "Decompositions and Policy Consequences of an Extraordinary Decline in Air Pollution from Electricity Generation," American Economic Journal: Economic Policy, American Economic Association, vol. 12(4), pages 244-274, November.
    18. Chirakijja, Janjala & Jayachandran, Seema & Ong, Pinchuan, 2019. "Inexpensive Heating Reduces Winter Mortality," IZA Discussion Papers 12195, Institute of Labor Economics (IZA).
    19. Dilek Uz & Callista Chim, 2022. "Intermittency in Wind Energy and Emissions from the Electricity Sector: Evidence from 13 Years of Data," Sustainability, MDPI, vol. 14(4), pages 1-14, February.
    20. Nandeeta Neerunjun & Hubert Stahn, 2023. "Renewable energy support: pre-announced policies and (in)-efficiency," AMSE Working Papers 2335, Aix-Marseille School of Economics, France.

    More about this item

    JEL classification:

    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ucp:jaerec:doi:10.1086/717417. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Journals Division (email available below). General contact details of provider: https://www.journals.uchicago.edu/JAERE .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.