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The Economics of Renewable Energy Support

The Economics of Renewable Energy Support

Full Title: The Economics of Renewable Energy Support
Author(s): Jan Abrell, Clemens Streitberger, and Sebastian Rausch
Publisher(s): Center of Economic Research (CER-ETH) at ETH Zurich
Publication Date: March 1, 2018
Full Text: Download Resource
Description (excerpt):

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.

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