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Interactions Between Climate Policies in the Power Sector

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Green Energy and Efficiency

Part of the book series: Green Energy and Technology ((GREEN))

Abstract

For the purpose of limiting global temperature increases, governments have designed a broad range of policy instruments in order to reduce carbon emissions such as carbon taxes, carbon markets and renewable energy support policies. Although such instruments aim to serve the same purpose, they are rarely fine-tuned to guarantee their consistency. Carbon markets are in theory the most efficient instrument to reduce emissions. The use of other instruments is justified under the presence of circumstances that undermine the effectiveness of carbon markets such as market design flaws or innovation externalities. In such cases, the optimal climate policy mix should be carefully designed to take into account the potential interactions between policy instruments.

*The authors thank Héctor Otero for his comments and suggestions and Jaime Pingarrón for his excellent research assistance. All remaining errors are of the authors. Paulina Beato: Independent economic and financial advisor. Juan Delgado: Research Associate at BC3 - Low Carbon Programme and Director at Global Economics Group.

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Notes

  1. 1.

    See IP/14/54 (22/01/2014): “2030 climate and energy goals for a competitive, secure and low-carbon EU economy” available at http://europa.eu/rapid/press-release_IP-14-54_en.htm.

  2. 2.

    The Climate and Energy Package set the guiding principles for the EU climate policy until 2020: a 20 % reduction in greenhouse gas emissions from 1990 levels, an increase of the share of EU energy consumption produced from renewable resources to 20 % and a 20 % improvement in the EU’s energy efficiency.

  3. 3.

    Batlle et al. [2] provide a comprehensive review of the interactions between EU climate policy instruments in the power sector.

  4. 4.

    In fact, according to the Commission impact analysis of the 2009 Climate Package (ANNEX TO THE IMPACT ASSESSMENT. Document accompanying the Package of Implementation measures for the EU objectives on climate change and renewable energy for 2020, p. 34), meeting the GHG reduction target would only require 15.8 % of renewables in total energy consumption. This implies that the remaining 4.2 % increased the cost of reducing emissions and, thus, did not constitute a cost efficient way to reduce GHG emissions. The Commission naively stated that putting a renewables policy in place would lower the carbon price necessary to deliver the GHG reduction commitment from €49/tCO2 to €39/tCO2 but did not evaluate the total cost of meeting the GHG target under the different scenarios.

  5. 5.

    CTW [9].

  6. 6.

    Kossoy and Ambrosi [19].

  7. 7.

    Betz [3].

  8. 8.

    Morris and Worthington [23].

  9. 9.

    For example, the TIMES-D model used by Götz et al. [15] which is based on the model generator TIMES, which has been developed in the scope of the Energy Technology Systems Analysis Programme (ETSAP) of the International Energy Agency (IEA), or the MARKAL model used by Unger and Ahlgren [24].

  10. 10.

    For example, Fischer and Newell [11].

  11. 11.

    The comparison of the results of the different analysis is complex given the large number of scenarios and parameters involved, the different assumptions, targets and diverse geographical coverage and the timeframe of the different exercises. The analysis at national level requires for example strong simplifying assumptions regarding the existing interferences in other countries.

  12. 12.

    Abrell and Weigt [1] reach this result for a quota of 20 %. However, their results seem too low as compared to Götz et al. [15].

  13. 13.

    Strict marginal cost of renewables is close to zero. However, since renewable generation plants are of a smaller scale, the cost of increasing fossil-fuelled capacity at a given point in time will be lower than the cost of increasing renewable capacity. To simplify, we embed marginal capacity costs into the renewable energy cost function such that marginal costs include not only operational costs but also the investment costs to increase capacity.

  14. 14.

    Under the presence of a negative externality from the production of a product, a tax on the externality or a subsidy for not producing the externality are equivalent. A subsidy to green energy can however affect negatively the price of fossil-fuelled energy and cause an inefficient increase in its consumption. Gelabert et al. [13] estimate that an increase of 1 GWh in the production of renewable energy implies a fall in the price of 2 € per MWh. Also, given the heterogeneity of energy sources, it is not trivial to design a subsidy that reflects avoided emissions (while in the case of a tax, the identification of the object of the tax is easier). See Borenstein [6] for a discussion on this issue.

  15. 15.

    For a discussion of the role and determination of the carbon price see Bowen [7]. In the US, there is no carbon price so the internalisation of GHG emission costs corresponds to renewables support mechanisms. See Joskow [18].

  16. 16.

    Note however that such a subsidy would not justify different subsidies to different non-emitting technologies.

  17. 17.

    Böhringer and Rosendahl [5].

  18. 18.

    See e.g. Del Río [20], Böhringer and Rosendahl [5], Abrell and Weigt [1].

  19. 19.

    See Borenstein [6].

  20. 20.

    Other common market failures discussed by the literature are asymmetric and imperfect information and principal-agent problems (which might explain household decisions to underinvest in renewable technologies but are not very much applicable to firms as explained by Gillingham and Sweeney [14]. Other justifications such as energy security, job creation, and driving down fossil fuel prices, are generally not supported by sound economic analysis.

  21. 21.

    As Borenstein [6] states, “most studies of learning-by-doing are not able to separate learning-by-doing from other changes” and “the evidence of strong learning-by-doing is thin and credible results on spillovers are even more rare”.

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Author information

Authors and Affiliations

  1. Independent economic and financial advisor, Madrid, Spain

    Paulina Beato

  2. BC3 - Low Carbon Programme, Bilbao, Spain

    Juan Delgado

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  1. Paulina Beato
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Correspondence to Juan Delgado .

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Editors and Affiliations

  1. University of the Basque Country, Bilbao, Spain

    Alberto Ansuategi

  2. Basque Centre for Climate Change(BC3), Bilbao, Spain

    Juan Delgado

  3. Basque Centre for Climate Change (BC3), Bilbao, Spain

    Ibon Galarraga

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Beato, P., Delgado, J. (2015). Interactions Between Climate Policies in the Power Sector. In: Ansuategi, A., Delgado, J., Galarraga, I. (eds) Green Energy and Efficiency. Green Energy and Technology. Springer, Cham. https://doi.org/10.1007/978-3-319-03632-8_11

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  • DOI: https://doi.org/10.1007/978-3-319-03632-8_11

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