Optimal Environmental Policies and Renewable Energy Investment: Evidence From the Texas Electricity Market

Abstract

Renewable electricity subsidies have been popular policy instruments to combat climate change because of their ability to offset emissions. This paper studies the long-run welfare benefits of optimizing the design of the existing renewable energy subsidy (the status quo) in the presence of heterogeneity in the offset emissions. In particular, I measure the welfare gain from differentiating renewable subsidies across location and time to reflect the environmental benefits from emissions offset in the context of wind energy in the Texas electricity market. I find that the welfare gain from differentiation is small compared to the gain already achieved under the status quo subsidy. In contrast, the optimal emissions tax yields much larger welfare gain because it engages in other cost-effective emissions abatement channels that renewable energy subsidies do not: namely, demand conservation and cross-plant fuel substitution.

The economics of renewable energy support

“…either wind or solarthus not permitting to investigate the implications of multiple heterogeneous RE resources for optimal policy design. Fell and Linn (2013) and Wibulpolprasert (2016) take into account the temporal and spatial resource heterogeneity, but focus on comparing RE policies in terms of their cost-effectiveness to achieve a given and exogenously determined emissions target. In contrast, our analysis explicitly considers a carbon externality and analyzes optimal RE policy design when the choice of environmental quality is endogenous.…”

Buffering Volatility: Storage Investments and Technology-Specific Renewable Energy Support

“…Third, we also make a connection to the emerging literature investigating the consequences of the fundamental heterogeneity of RE technologies with respect to availability patterns. Abrell et al (2019b) consider the environmental value and market value of different renewables and define an environmental motive for differentiating subsidies by technology, while Fell and Linn (2013) and Wibulpolprasert (2016) investigate the impact of resource heterogeneity on cost-effectiveness of different abatement policies. Empirical studies like Abrell et al (2019a) evaluate different market values and environmental values of RE sources ex-post.…”

(Mis)allocation of Renewable Energy Sources

“…9 See also Wibulpolprasert [2016]. Similarly, in a theoretical exercise, Ambec and Crampes [2019] show that FiTs can be complemented with a price cap and capacity payments to obtain equivalent outcomes to a carbon tax.…”