Advertisement

The Welfare Effects of Environmental Taxation and Subsidization on Renewable Energy Sources in an Oligopolistic Electricity Market

  • Isamu MatsukawaEmail author
Chapter
  • 30 Downloads

Abstract

This chapter investigates the impact of environmental taxation and subsidization on non-polluting renewable power plants. Their dispatch is prioritized in a wholesale electricity market in which oligopolistic firms produce electricity both from polluting fossil-fuel inputs and non-polluting renewable energy sources, and competitive fringe firms produce electricity only from non-polluting renewable energy sources. To examine the welfare impacts of levying a tax on emissions of pollutants from fossil-fuel power plants and granting subsidies to renewable power plants, this chapter develops a three-stage model with the endogenous capacity of renewable power plants, forward contracts on electricity, and the operation of fossil-fuel power plants. An emission tax imposed on fossil-fuel use is expected to discourage firms from operating their fossil-fuel power plants, thereby promoting substitution of renewable energy sources for fossil-fuel inputs. A subsidy provided to firms building renewable power plants is expected to reduce the setup costs, thereby promoting the use of renewable energy sources. Using simulations, this chapter makes a welfare comparison between an emission tax on fossil-fuel use and a subsidy for renewable power plants and analyzes how these environmental policies affect a wholesale electricity market.

Notes

Acknowledgements

This work was supported by JSPS KAKENHI Grant Number 18K01626.

References

  1. 1.
    Abrella J, Koscha M, Rausch S (2019) Carbon abatement with renewables: evaluating wind and solar subsidies in Germany and Spain. J Public Econ 169:172–202CrossRefGoogle Scholar
  2. 2.
    Acemoglu A, Kakhbod A, Ozdaglar A (2017) Competition in electricity markets with renewable energy sources. Energy J 38(SI):137–155Google Scholar
  3. 3.
    Aldy J, Gerarden T, Sweeney R (2018) Investment versus output subsidies: implications of alternative incentives for wind energy. In: NBER working paper 24378Google Scholar
  4. 4.
    Allaz B, Vila J (1993) Cournot competition, forward markets, and efficiency. J Econ Theor 59(1):1–16zbMATHCrossRefGoogle Scholar
  5. 5.
    Annan-Phan S, Roques F (2018) Market integration and wind generation: an empirical analysis of the impact of wind generation on cross-border power prices. Energy J 39(3):1–23CrossRefGoogle Scholar
  6. 6.
    Ardian F, Concettini S, Creti A (2018) Renewable generation and network congestion: an empirical analysis of the Italian power market. Energy J 39(SI2):3–39Google Scholar
  7. 7.
    Arimura T, Iwata K (2015) An evaluation of Japanese environmental regulations. SpringerGoogle Scholar
  8. 8.
    Ben-Moshe O, Rubin O (2015) Does wind energy mitigate market power in deregulated electricity markets? Energy 85:511–521CrossRefGoogle Scholar
  9. 9.
    Bhandari V, Giacomoni AM, Wollenberg B, Wilson EJ (2017) Interacting policies in power systems: renewable subsidies and a carbon tax. Electr J 30(6):80–84CrossRefGoogle Scholar
  10. 10.
    Brown D, Eckert A (2018) Imperfect competition in electricity markets with renewable generation: the role of renewable compensation policies. In: Working paper 2018-12. University of Alberta, Department of EconomicsGoogle Scholar
  11. 11.
    Bushnell J, Novan K (2018) Setting with the sun: the impacts of renewable energy on wholesale power markets. In: Energy Institute Working Paper 292, Energy Institute at HaasGoogle Scholar
  12. 12.
    Butler L, Neuhoff K (2008) Comparison of feed-in tariff, quota and auction mechanisms to support wind power development. Renew Energy 33(8):1854–1867CrossRefGoogle Scholar
  13. 13.
    Ciarreta A, Espinosa MP, Pizarro-Irizar C (2017) Has renewable energy induced competitive behavior in the Spanish electricity market? Energy Policy 104:171–182CrossRefGoogle Scholar
  14. 14.
    Cludius J, Hermann H, Matthes FC, Graichen V (2014) The merit order effect of wind and photovoltaic electricity generation in Germany 2008–2016: estimation and distributional implications. Energy Econ 44:302–313CrossRefGoogle Scholar
  15. 15.
    Couture T, Gagnon Y (2010) An analysis of feed-in tariff remuneration models: implications for renewable energy investment. Energy Policy 38(2):955–965CrossRefGoogle Scholar
  16. 16.
    Garcia A, Alzate JM, Barrega J (2012) Regulatory design and incentives for renewable energy. J Regul Econ 41(3):315–336CrossRefGoogle Scholar
  17. 17.
    Genc TS, Reynolds SS (2019) Who should own a renewable technology? Ownership theory and an application. Int J Ind Organ 63:213–238CrossRefGoogle Scholar
  18. 18.
    Green R, Vasilakos N (2010) Market behaviour with large amounts of intermittent generation. Energy Policy 38(7):3211–3220CrossRefGoogle Scholar
  19. 19.
    Japan Ministry of Economy, Trade and Industry (2012) Report on costs of power plants, energy and environmental council (in Japanese)Google Scholar
  20. 20.
    Japan Ministry of Economy, Trade and Industry (2018) Taxation that aims at promoting investment for renewable energy (in Japanese). https://www.enecho.meti.go.jp/category/saving_and_new/new/information/180404a/summary.html. Accessed 17 July 2019
  21. 21.
    Lesser JA, Su X (2008) Design of an economically efficient feed-in tariff structure for renewable energy development. Energy Policy 36(3):981–990CrossRefGoogle Scholar
  22. 22.
    Matsukawa I (2016) Consumer energy conservation behavior after Fukushima: evidence from field experiments. SpringerGoogle Scholar
  23. 23.
    Matsukawa I (2019) Detecting collusion in retail electricity markets: Results from Japan for 2005 to 2010. Utilities Policy 57:16–23CrossRefGoogle Scholar
  24. 24.
    Milstein I, Tishler A (2015) Can price volatility enhance market power? The case of renewable technologies in competitive electricity markets. Resour Energy Econ 41:70–90CrossRefGoogle Scholar
  25. 25.
    Oliveira T (2015) Market signals and investment in variable renewables. Available at SSRN: https://ssrn.com/abstract=2695596
  26. 26.
    Percebois J, Pommeret S (2018) Cross-subsidies tied to the introduction of intermittent renewable electricity: an analysis based on a model of the French day-ahead market. Energy J 39(3):245–267CrossRefGoogle Scholar
  27. 27.
    Pollitt M, Anaya K (2016) Can current electricity markets cope with high shares of renewables? A comparison of approaches in Germany, the UK and the State of New York. Energy J 37(SI2):69–88Google Scholar
  28. 28.
    Reguant M (2018) The efficiency and sectoral distributional implications of large-scale renewable policies. In: NBER working paper 24398Google Scholar
  29. 29.
    Reichenbach J, Requate T (2012) Subsidies for renewable energies in the presence of learning effects and market power. Resour Energy Econ 34(2):236–254CrossRefGoogle Scholar
  30. 30.
    Ritz R (2016) How does renewable competition affect forward contracting in electricity markets? Econ Lett 146:135–139MathSciNetzbMATHCrossRefGoogle Scholar
  31. 31.
    Schmalensee R (2012) Evaluating policies to increase electricity generation from renewable energy. Rev Environ Econ Policy 6(1):45–64CrossRefGoogle Scholar
  32. 32.
    Schneider I, Roozbehani M (2017) Wind capacity investments: inefficient drivers and long-term impacts. In: MIT Center for energy and environmental policy research working paper CEEPR WP 2017-002Google Scholar
  33. 33.
    Stoft S (2002) Power system economics: designing markets for electricity. Wiley-IEEE PressGoogle Scholar
  34. 34.
    Tietenberg TH (2013) Reflections—carbon pricing in practice. Rev Environ Econ Policy 7(2):313–329CrossRefGoogle Scholar
  35. 35.
    Twomey P, Neuhoff K (2010) Wind power and market power in competitive markets. Energy Policy 38(7):3198–3210CrossRefGoogle Scholar
  36. 36.
    von der Fehr NHM, Ropenus S (2017) Renewable energy policy instruments and market power. Scand J Econ 119(2):312–345zbMATHCrossRefGoogle Scholar
  37. 37.
    Woo CK, Horowitz I, Moore J, Pacheco A (2011) The impact of wind generation on the electricity spot-market price level and variance: the Texas experience. Energy Policy 39(7):3939–3944CrossRefGoogle Scholar
  38. 38.
    Woo CK, Moore J, Schneiderman B, Ho T, Olson A, Alagappan L, Chawla K, Toyama N, Zarnikau J (2016) Merit-order effects of renewable energy and price divergence in California’s day-ahead and real-time electricity markets. Energy Policy 92:299–312CrossRefGoogle Scholar
  39. 39.
    Wurzburg K, Labandeira X, Linares P (2013) Renewable generation and electricity prices: taking stock and new evidence for Germany and Austria. Energy Econ 40(S1):S159–S171CrossRefGoogle Scholar

Copyright information

© Springer Nature Singapore Pte Ltd. 2020

Authors and Affiliations

  1. 1.Faculty of EconomicsMusashi UniversityTokyoJapan

Personalised recommendations