Report: Environment and Technology Policy Options in the Electricity Sector: Interactions and Outcomes 2013/01/23
Carolyn Fischer, RFF, R. Newell and L. Preonas
Myriad policy measures aim to reduce greenhouse gas emissions from the electricity sector, promote generation from renewable sources, and encourage energy conservation. Do these measures work together or at cross purposes? A critical issue is the extent to which innovation and energy efficiency market failures justify additional interventions when a carbon price is in place. To assess the performance of overlapping policies, we extend the two-stage model of Fischer and Newell (2008) to include advanced and conventional renewable energy technologies and both short and long-run investments in energy efficiency improvements. We incorporate both knowledge spillovers and imperfections in the demand for energy efficiency. We conclude that some technology policies can be useful complements to emissions pricing, but ambitious renewable portfolio standards or production subsidies seem unlikely to enhance welfare. Correcting R&D market failures has a larger potential for reducing the costs of achieving significant emissions reductions. The desirability of stringent energy efficiency policies is highly sensitive to the degree of undervaluation, which also has implications for the cost-effectiveness of policies (like renewable energy subsidies) that keep electricity prices low. Even with multiple market failures, emissions pricing remains the single most cost-effective option for meeting emissions reduction goals. In sum, technology policies are very poor substitutes, and when they overreach, they can be poor complements too.