Københavns Universitet. Addressing the Climate Problem Amundsen, Eirik S; Andersen, Peder; Mortensen, Jørgen Birk. Publication date: 2018

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1 universit of oenagen Købenavns Universitet Addressing te Climate Problem Amundsen Eirik S; Andersen Peder; Mortensen Jørgen Birk Publiation date: 18 Doument Version Publisers PDF also known as Version of reord Citation for ublised version APA: Amundsen E. S. Andersen P. & Mortensen J. B. 18. Addressing te Climate Problem: Coie between Allowanes Feed-in Tariffs and Taes. Muni Soiet for te Promotion of Eonomi Resear CESifo. CESifo orking Paers No. 696 Download date: 3. jun.. 18

2 Februar 18 Addressing te Climate Problem: Coie between Allowanes Feed-in Tariffs and Taes Eirik S. Amundsen Peder Andersen Jørgen Birk Mortensen

3 Imressum: CESifo orking Paers ISSN eletroni version Publiser and distributor: Muni Soiet for te Promotion of Eonomi Resear CESifo GmbH Te international latform of Ludwigs Maimilians Universit s Center for Eonomi Studies and te ifo Institute Posingerstr Muni German Teleone Telefa offie@esifo.de Editors: Clemens Fuest Oliver Falk Jasmin Grösl grou.org/w An eletroni version of te aer ma be downloaded from te SSRN website: from te RePE website: from te CESifo website: grou.org/w

4 CESifo orking Paer No. 696 Categor 1: Energ and Climate Eonomis Addressing te Climate Problem: Coie between Allowanes Feed-in Tariffs and Taes Abstrat Instruments osen to ursue limate related targets are not alwas effiient. In tis aer we onsider an eonom wit tree limate related targets for its eletriit generation: a given sare of green eletriit a given eansion of green eletriit and a given redution of blak fossil based eletriit. At its disosal te ountr as tree instruments: an allowane sstem tradable green ertifiates a subsid sstem feed-in tariffs and a Pigouvian fossil ta. Ea of tese instruments ma be used to attain an of te given targets. itin te setting of te model it is verified tat ea kind of te target as onl a single effiient instrument under ertaint and tat tere is a deadweigt loss of using oter instruments to aieve te target. Similarl tere is also an analsis of instrument oie wen several targets are to be attained at te same time. Te aer also disusses te ase of simultaneous targets as well as te relevane of te various targets. JEL-Codes: C7 Q8 Q4 Q48. Kewords: energ oli green ertifiates subsidies Pigouvian taes limate ange. Eirik S. Amundsen Deartment of Eonomis Universit of Bergen Bo 78 Norwa 5 Bergen eirik.amundsen@eon.uib.no Peder Andersen Deartment of Food and Resoure Eonomis Universit of Coenagen / Denmark ean@ifro.ku.dk Jørgen Birk Mortensen Deartment of Eonomis Universit of Coenagen / Denmark Jorgen.Birk.Mortensen@eon.ku.dk orresonding autor Finanial suort from te Statoil-UiB rogram is igl areiated.

5 1. Introdution Man ountries ave targets and measures to address te limate ange roblem. Te targets ome in different forms: targets on greenouse gas redution targets on sares of renewable energ e.g. Denmark and targets on green energ generation e.g. Norwa and Sweden. Along wit tese targets several measures and instruments are roosed and ut into use: CO taes or emission ermits allowanes tradable green ertifiates 5 and feed- in tariffs/ feed-in remiums. In rinile ea of tese instruments ma be alied to attain ea of te targets but te are not neessaril equall effiient. In an analti model designed for an eletriit market we sow tat ea target as onl one single effiient instrument. Hene oosing te wrong instrument to attain a target will result in a loss to soiet. Tese are basi and straigtforward results tat sould not be forgotten in deiding on wi instruments to use. However te results need to be verified and te objetives of te targets need to be evaluated. An analsis of tis kind seems relevant for man eonomies bot witin te EU te USA and for large eonomies su as Cina and India. itin te EU and te EEA targets on greenouse gas emission sare of renewables and green energ generation are generall governed b te seifi EU and 3 oliies on energ use. Hene for te target is to redue CO emission b % omared to te level of 199 and to inrease te sare of renewables to % EU-COM 1. For 3 te orresonding numbers are 4% and 7% resetivel EU-Com For te eletriit market all EU member states and artiiating EEA ountries are inluded in a ommon emission ermit market for CO te EU emission trading sstem ETS. it reset to te targets on green eletriit te EU/EEA member states are at libert of oosing a sare target or a seifi green generation aait target and to deide wi instruments to use to attain tose targets. Some ountries fous mainl on te renewable sare target e.g. Denmark wile oters use quantitative eansion of green generation aait e.g. Norwa and Sweden. it reset to te instruments alied some ountries use a 5 Green ertifiate sstems are in use in several ountries e.g. te UK Renewable Obligation Certifiates Norwa and Sweden elsertifikater and te US Renewable Portfolio Standards 6 In addition te EU as ommon targets on energ effiien and energ savings bot for te eriod u to and u to 3. However no ountr seifi targets or instruments are determined.

6 single instrument e.g. te ommon allowane sstem for Norwa and Sweden wile some ountries ombine several instruments e.g. te UK. 7 A similar iture to tat of te EU is valid for te USA. For instane California as a target of 4% redution of greenouse gases b 3 as omared wit 199 and a target of 5% sare of renewables in eletriit generation b 3 California Government 15 Senate Bill 35. To aieve tose targets bot emission ermits a and trade rograms and tradable green ertifiates renewable ortfolio standards are in use. Oterwise regional ooeration between states is imortant. California ooerates wit Britis Columbia Ontario Quebe and Manitoba troug te estern Climate Initiative to develo armonied a and trade rograms. Similar rograms are also in use in several Norteast Eastern states troug te so-alled Regional Greenouse Gas Initiative RGGI. Aording to Cina s Nationall Determined Contribution NDC lan submitted to te UNFCCC for te Paris Agreement Cina as targets of eaking CO emissions b 3 lowering te arbon intensit of GDP b 6% 65% below 5 levels b 3 and inreasing te sare of non-fossil energ to around % b tat time. Measures and instruments in use are rimaril seifi lans to restrit oal onsumtion and seifi suort to inrease renewable aait. However an initiative to develo a nationwide arbon emission trading market is also taken. Aording to India s NDC India as targets to lower te emissions intensit of GDP b 33% to 35% b 3 below 5 levels and to inrease te sare of non-fossil based ower generation aait to 4% of installed eletri ower aait b 3 equivalent to 6 3% of generation in 3. India s measures and instruments to aieve te targets are mainl in te ategor of rodution lans and diret investments but India as also 7 In te UK te generation of eletriit from renewable soures is suorted troug a ombination of a feed-in tariff sstem Contrats for Differene sstem a quota sstem in terms of a quota obligation and a ertifiate sstem and a ta meanism. In German eletriit from renewable soures is mainl suorted troug a market remium determined troug a tendering seme wile smaller lants an benefit from a feed-in tariff. In Frane eletriit from renewable soures is romoted troug a feed-in tariff a remium tariff as well as troug tenders for te definition of te remium tariff level. Additionall ta benefits are also available. 3

7 an emerging a and trade market and a green ertifiate market a Renewable Energ Certifiate trading sstem. Hene man eonomies around te world ave similar limate related targets as well as make use of similar instruments. Te instruments in question are well investigated. Tere eists an abundant literature on te funtioning of blak ertifiate emission ermit sstems see e.g. Ellerman 1. In addition a siable literature on green ertifiate sstem as emerged. Some of te literature addresses te interla between te green ertifiate market and te eletriit market e.g. Nese 3; Amundsen Baldursson and Mortensen 6; Fiser 9; Amundsen and Nese 9; Fiser and Preonas 1 wile some onsider te eletriit market te blak ertifiate market and te green ertifiate market e.g. Amundsen and Mortensen 1 ; Unger and Algren 5; Böringer and Rosendal 1. Furtermore some anale te oeistene between an eletriit market a blak ertifiate market and feed-in tariffs. Reentl some literature as emerged addressing all ertifiate sstems taken togeter Meran and ittmann 1. Feed-in tariffs and feed-in remiums are also well analed e.g. Traber and Kemfert 9 anale te relationsi between feed-in tariffs and te CO ermit market wile Dressler 16 investigates ow feed-in tariffs and feed-in remiums interla wit eletriit market wit reset to market ower eertion. Hene ow tese instruments funtion is well known but wat we seek ere is to investigate ow te instruments erform wit reset to aieving te targets at least ost to soiet. Te lan of te aer is as follows. Setion introdues an analtial model and setion 3 resents te targets and anales wat arateries te soiall first best solutions. Setion 4 resents te instruments and setion 5 studies ow ea of te targets ma be obtained b using ea of te instruments wile alulating te soial surlus. Setion 6 disusses te results and te objetives of te targets wereas setion 7 onludes and summaries te aer.. Basi model In order to anale te relationsi between targets and instruments we onsider a basi model for an eletriit market. It is assumed tat eletriit roduers sul a ommon wolesale market witin wi a single wolesale eletriit rie is 4

8 establised. Eletriit generation is based on bot fossil fuel blak eletriit and on renewable soures green eletriit. Retailers urase eletriit on te wolesale market. Te eletriit is furter distributed to end-users and a single enduser rie is establised. For simliit distribution is assumed to be ostless. Perfet ometition is assumed to revail all around wit man roduers of blak and green eletriit man retailers and man end-users of eletriit. Hene all agents treat te various ries as given b te market. e al te following smbols and funtional relationsis. End-user rie of eletriit q olesale rie of eletriit Generation of "blak" eletriit Generation of "green" eletriit Total onsumtion of eletriit were : Inverse demand funtion of eletriit were / : Industr ost funtion 8 for blak eletriit were and : Industr ost funtion for green eletriit were and 9.. : Profit funtion 8 Te industr ost funtion is derived b oriontal addition of individual ost funtions i.e. ost minimiation of aggregate market sul. Te reason for using te industr ost funtion is tat we avoid mess notation for desribing individual deisions. Our rime interest is wit te equilibrium market solution and not wit individual deisions as su. However not ver mu is lost b tis aroa as individual first order onditions for eletriit roduers orresond diretl to tose derived in te analsis. 9 Blak eletriit lants e.g. oal fired ower lants ma well be reliated at onstant ost wereas green eletriit generation from e.g. wind ower tiall is restrited b Nature s varing sul of good sites for wind mills. For tis reason we assume an inreasing marginal industr ost funtion for green eletriit lants. Observe tat sort run marginal ost of wind ower is lose to ero i.e. from eisting lants. However in tis aer we onsider new aait for green eletriit generation. 5

9 Base ase itout an targets and instruments te roduers at as if te jointl maimie q. Te first order ondition for blak eletriit and green eletriit generation is q and q resetivel. Hene tis is te ver basi ase were marginal generation osts sould be te same for te two generation tenologies. As tere are no distribution osts b assumtion we ave:. For later use we denote te otimal solution of tis basi roblem b. 3. Targets In te following we onsider otimal soial solutions for a lanner faing ea of tree targets: a sare target a target of green eletriit eansion and a target of blak eletriit redution. Target of a given sare of green eletriit Assume te objetive of a soial lanner is to attain a target of a given sare of renewable energ and - to ave an interesting roblem- tat Te soial lanner s roblem is ten to maimie: at te outset. subjet to: 1 Uon substitution te first order ondition for tis maimiation roblem is seen to be equal to 1 1 Tis ondition sas tat te end user rie sould be equal to a linear or onve ombination of marginal osts wit te erentage target as a weigt. For later use we denote te otimal solution for tis target b. Observe tat wit te assumed funtional forms and te onstraints and 1 te solution 6

10 is a unique solution to tis otimiation roblem. Te soial surlus 1 for tis target is 1 1 d d 1 Target of a given eansion of green eletriit Assume te objetive of te soial lanner is to attain a target of a given quantit of renewable energ and assume tat te unregulated quantit of green eletriit is less tan te regulator s target i.e.. Te soial lanner s roblem is ten to maimie: subjet to:. Denoting te sadow rie of te onstraint b te first order ondition is equal to As for a binding onstraint te marginal ost for green eletriit sould eeed tat of blak eletriit. e denote te otimal solution for tis target b. Observe tat wit te assumed funtional forms and te onstraint tis solution is a unique solution to tis otimiation roblem. Te soial surlus for tis target is d Target of a given redution of blak eletriit Assume tat te objetive of te soial lanner is to redue te emission of CO stemming from te generation of blak eletriit to a ertain level and for simliit tat tere is a one to one relationsi between te generation of blak eletriit and te emission ofco. Let furter denote te orresonding target of blak eletriit 1 Te soial surluses alulated in te following do not inlude te ossible soial gains of te regulation e.g. te value of te internaliation of a negative eternalit. For a given target su a gain will be te same for all instruments tat attain tat target. 7

11 generation and assume tat te unregulated quantit of blak eletriit is larger tan te regulator s target i.e.. Te soial lanner s roblem is ten to maimie: subjet to:. Denoting te sadow rie of te onstraint b te first order ondition is equal to 3 As for a binding onstraint te marginal ost for blak eletriit sould be smaller tan tat of green eletriit. e denote te otimal solution for tis target b. Observe tat wit te assumed funtional forms and te onstraint tis solution is a unique solution to tis otimiation roblem. Te soial surlus for tis target is d 4. Instruments In order to attain te targets te soial lanner is assumed to ave tree instruments at disosal: a tradable green ertifiates sstem denoted TGC a unit subsid feed-in tariff denoted and a unit ta on blak eletriit denoted. Te funtioning of te last two instruments are well known but te nature of te first mentioned instrument needs some elanation. Tradable Green Certifiates TGC As for an oter market te markets for TGCs onsist of suliers and buers. Suliers are te roduers of green eletriit tat reeive an amount of TGCs orresonding to te amount of green eletriit te generate. Te suliers tus ma sell tese TGCs on te TGC market. Hene te roduers reeive in tis wa bot te wolesale rie and te TGC rie er M green eletriit generated. Buers of TGCs are te retailers/onsumers tat are obliged b te government to kee a ertain sare "te erentage requirement" of TGCs out of total eletriit onsumed i.e. te sum of green and blak eletriit. Tus te demand for TGCs is 8

12 siml derived as a erentage of te total end use demand for eletriit. On te basis of sul and demand a single TGC rie denoted s is establised. it a large number of retailers te equilibrium establised in te market i.e. te ometitive equilibrium must be arateried b: 4 q s. e assume te amount of TGCs is measured in te same units as te amount of green eletriit. Tus te demand of TGCs is given b given b g s. g d and te sul of TGCs is 5. Attaining a single target b various instruments In tis setion we onsider ow te targets ma be attained b aling te various instruments. 5.1 Target of a given sare of green eletriit In tis ase te objetive of te soial lanner is to attain a target of a given sare of renewable eletriit. From eression 1 we know tat te otimalit ondition for tis ase is tat rie sould be equal to a linear ombination of te marginal generation osts of te two tenologies wit te sare as weigt. Using a TGC-sstem to attain te sare target it tis instrument te roduers at as if te seek to maimie q s q. Te first order ondition for blak and green eletriit generation is: q and q s resetivel. Denoting te market solution of tis ase b TGC TGC TGC arateried b q s TGC TGC te equilibrium of te two markets is tus 9

13 5 TGC qtgc stgc. 6 TGC TGC. TGC TGC 7 qtgc TGC. 8 q s. TGC TGC TGC Inserting 6 7 and 8 in 5 we find tat te end-user rie in equilibrium ma be written as a linear ombination of te marginal ost of blak and green eletriit: 9 1. TGC From 6 we see tat TGC TGC TGC and tat TGC TGC 1 TGC. Also we see tat 9 is eatl equal to 1 werefore we onlude tat te TGC sstem is an otimal instrument for attaining te target of a given sare of renewables i.e. TGC TGC TGC target wen using te TGC instrument b. Terefore denoting te soial surlus for tis TGC we must ave TGC. Using a feed in tariff to attain te sare target In tis ase a feed-in tariff is given er unit of green eletriit generated in order to attain te sare target. Te effet of a feed-in tariff is to make green eletriit more rofitable and blak eletriit relativel less rofitable su tat a substitution takes lae in rodution and makes te sare of green eletriit iger. In tis ase te roduers at as if te seek to maimie e denote te market solution of tis ase b were te smbol signifies te subsid neessar to inrease te sare of renewables su tat te -target is attained. Te first order onditions of tis solution is 1 1

14 11 Clearl tis ondition does not satisf 1. To see tis observe tat 1 1 Hene te first order neessar ondition for obtaining a given sare of renewables in an otimal wa effiientl is not satisfied wen using a feed-in tariff. In fat it turns out tat too mu eletriit is generated b using su a subsid sstem as omared wit wat is soiall otimal in order to attain te sare target i.e.:. To see tis assume te oosite i.e. and seek a ontradition. Observe tat tis assumtion also imlies as te -sare is satisfied wit bot instruments. As it ten follows tat. Net observe again tat 1 and from 1 tat 1. Hene te ontraditor assumtion imlies tat 1 1. Rearranging terms we find tat 1. However tis is a ontradition due to te assumed onveit of te ost funtions and te ontraditor assumtion tat imling and. Hene we must ave. For tis solution te soial surlus is 1 1 l d Te smbol l reresents te lum sum value of te total subsid i.e. l tat omes from outside of te eletriit setor and terefore as to be subtrated in alulating te soial surlus using tis instrument. Rewriting te eression for te soial surlus we find 1 d e know tat maimies tis eression. Terefore as we must ave.

15 1 Using a ta to attain te sare target In tis ase a ta is levied er unit of te blak eletriit generated in order to attain te sare target. Te effet of a ta on blak eletriit is to make green eletriit relativel more rofitable and blak eletriit relativel less rofitable su tat a substitution takes lae in rodution and makes te sare of green eletriit iger. In tis ase te roduers at as if te seek to maimie e denote te market solution of tis ase b were te smbol signifies te ta neessar to redue te sare of blak eletriit su tat te - target is attained. Te first order ondition of tis solution is 11 Clearl tis ondition does not satisf 1. To see tis observe tat 1 1 Hene te first order neessar ondition for obtaining a given sare of renewables in an otimal wa effiientl is not satisfied wen using a ta. In fat it turns out tat too little eletriit is generated b using a ta sstem as omared wit wat is soiall otimal in order to attain te sare target i.e.:. To see tis seek a ontradition and assume te oosite i.e.. Observe tat tis assumtion also imlies as te -sare is satisfied using bot instruments. As it follows tat. Net observe again tat 1 and from 1 tat 1. Hene te ontraditor assumtion imlies tat 1 1. Rearranging terms we find tat 1 1. However tis is a ontradition due to te assumed onveit of te ost funtions and te ontraditor assumtion tat imling and

16 Hene we must ave te soial surlus is. For tis solution Te smbol 1 1 d l l reresents te lum sum value of te total ta i.e. l subtrated from te eletriit setor and tat terefore as to be added in alulating te soial surlus using tis instrument. Rewriting te eression for te soial surlus we find d 1 e know tat maimies tis eression. Terefore as we must ave. 5.. Target of a given eansion of green eletriit In tis ase te objetive of te soial lanner is to attain a target of a given quantit of renewable energ. From eression we know tat te otimalit ondition for tis ase is tat rie sould be equal to te marginal ost of green eletriit minus a sadow rie of te onstraint and also equal to te marginal ost of blak eletriit. Using a TGC-sstem to attain te target of a given eansion of green eletriit For tis instrument te roblem of te soial lanner is to determine te sie of te erentage requirement tat indues te market to aieve a quantit of green eletriit tat is equal to. 11 market solution using tis instrument b e denote tis erentage requirement b and te TGC q TGC TGC TGC stgc. From setion 5.1. we know tat te market solution for tis instrument must be arateried b te following otimalit onditions 11 Te idea is tat green eletriit ma be stimulated b inreasing te sie of te erentage requirement. However furter assumtions on te funtional forms of bot te generation osts and te demand funtion are needed to ensure tis see Amundsen and Mortensen 1. Tese assumtions are reasonable and realisti wen onsidering seifi eletriit markets see Amundsen and Be 16 for te ase of te Norwegian eletriit market. 13

17 1 1 TGC TGC e also know tat TGC and tat TGC. 1 TGC Clearl ondition 1 does not satisf te otimalit ondition as seen from te oint of view of te soial lanner i.e. ondition. In fat we will ave TGC 1 TGC From tis it also follows tat. To see tis assume tat te oosite is true TGC and seek a ontradition i.e. assume 1 TGC Tis assumtion also imlies and. Rearrange tis eression and find TGC TGC TGC TGC Insetion of signs sow tat tis is a ontradition as te left and side of te eression is stritl ositive i.e. and s. TGC TGC TGC Hene we must ave ma be written and. it tis solution te soial surlus TGC TGC TGC TGC d 1 ˆ TGC TGC TGC TGC d TGC e know tat maimies tis eression. Terefore as it follows TGC tat. TGC 14

18 Using a feed-in tariff to attain te target of a given eansion of green eletriit In tis ase a feed-in tariff is given er unit of te green eletriit generated in order to attain te target. e denote te market solution b were te smbol signifies te feed-in tariff neessar to inrease te quantit of green eletriit su tat te -target is attained. e know from earlier tat te market solution must be arateried b 13 Comaring 13 wit we see tat a feed-in tariff equal to te sadow rie will effiientl indue te otimal solution as seen from te oint of view of te soial lanner i.e.. Hene not uneetedl we find tat a feed-in tariff on green eletriit generation will effiientl aieve te target of eanding te generation of green eletriit. Denoting te soial surlus using tis instrument b we find tat. Using a ta on blak eletriit to attain te target of a given eansion of green eletriit In tis ase a ta is levied er unit of te blak eletriit generated in order to attain te target. Te effet of a ta on blak eletriit is to make green eletriit relativel more rofitable and blak eletriit relativel less rofitable su tat a substitution takes lae in rodution and stimulates green eletriit generation 1. e denote te market solution b were te smbol signifies te ta neessar to inrease te quantit of green eletriit su tat te -target is attained. e know from earlier tat te market solution must be arateried b 14 1 Formall we need to sow tat a ta on blak eletriit will atuall inrease te quantit generated of green eletriit and not onl inrease te relative sare. It turns out tat te ondition for aving a ositive inrease of green eletriit is: /. Tis ondition is satisfied under te assumtions of te model. 15

19 Comaring 14 wit we see tat. Hene using a ta to attain te target does not give rise to te otimal solution as seen from te oint of view of view of te soial lanner. Clearl we find tat bot total eletriit generation as well as te generation of blak eletriit is too small as omared wat is regulator otimal i.e. and. After adding te lum sum value of te total ta revenue to omensate for te ta take te soial surlus using tis instrument is equal to e know tat. d maimies tis eression. Terefore as we must ave 5.3. Target of a given redution of blak eletriit In tis ase te objetive of te soial lanner is to redue te generation of blak eletriit to attain a level of renewable energ. From eression 3 we know tat te otimalit ondition for tis ase is tat rie sould be equal to te marginal ost of blak eletriit lus te sadow rie of te onstraint and also equal to te marginal ost of green eletriit. Using a TGC-sstem to attain te target of a given redution of blak eletriit For tis instrument te roblem of te soial lanner is to determine te sie of te erentage requirement tat indues te market to aieve a quantit of blak eletriit tat is equal to. 13 e denote tis erentage requirement b and te market solution using tis instrument b q TGC TGC TGC TGC s TGC. From setion 5.1. we know tat te market solution for tis instrument must be arateried b te following otimalit onditions 15 1 TGC TGC 13 Under te assumtions of te model it is a lear ut result tat te generation of blak eletriit will fall as te sie of te erentage requirement is inreasing see Amundsen and Mortensen. 16

20 e also know tat TGC TGC and tat 1. TGC Generall ondition 15 does not satisf te otimalit ondition as seen from te oint of view of te soial lanner i.e. ondition 3. In fat we will ave TGC 1 TGC From tis it also follows tat and. To see tis assume te TGC TGC oosite is true and seek a ontradition i.e. assume TGC TGC Tis assumtion also imlies tat and. As tis imlies TGC TGC and as 1 we learl ave a ontradition. Hene we must TGC ave and. it tis solution te soial surlus ma be written TGC TGC TGC TGC d 1 TGC TGC TGC TGC d TGC e know tat maimies tis eression. Terefore as it follows TGC tat. TGC Using a feed-in tariff on green eletriit to attain te target of a given redution of blak eletriit In tis ase a feed-in tariff is given er unit of te green eletriit generated in order to attain te target. e denote te market solution b were te smbol signifies te feed-in tariff neessar to inrease te quantit of 17

21 green eletriit su tat te -target is attained. e know from earlier tat te market solution must be arateried b 16 Comaring 16 wit 3 we see tat. Hene using a feed-in tariff to attain te target does not give rise to te otimal solution as seen from te oint of view of te soial lanner. Clearl we find tat bot total eletriit generation as well as te generation of green eletriit is too large as omared wat is soiall otimal i.e. and. After subtrating te lum sum value of te total subsid to omensate for te subsid given to te eletriit market te soial surlus using tis instrument is equal to d e know tat maimies tis eression. Terefore as we must ave. Using a ta on blak eletriit to attain te target of a given redution of blak eletriit In tis ase a ta is levied er unit of te blak eletriit generated in order to attain te target. e denote te market solution b were te smbol signifies te ta neessar to redue te quantit of blak eletriit su tat te -target is attained. e know from earlier tat te market solution must be arateried b 16 Comaring 16 wit 3 we see tat a ta set equal to te sadow rie will effiientl indue te otimal solution as seen from te oint of view of te soial lanner i.e.. Hene not uneetedl we find tat a ta 18

22 on blak eletriit generation will effiientl aieve te target of reduing te generation of blak eletriit. Hene denoting te soial surlus using tis instrument b we must ave. 6. Simultaneousl attaining several targets b various instruments Net we turn to te ase of simultaneousl attainment of te roosed targets. Hene we assume tat te generation of green eletriit sould be at least as large as a given target and simultaneousl tat te generation of blak eletriit sould not be larger tan a given target. Te soial lanner s otimiation roblem is ma subjet to: and Denoting te sadow ries of green and blak eletriit b and resetivel te following first order onditions must simultaneousl be satisfied 17 e denote te otimal solution for tese targets b:. Clearl attaining bot targets wit a single instrument is not generall feasible Tinbergen 195. A subsid of green eletriit ould be designed to aieve te green target but ould onl b ane attain te blak target at te same time just as a ta on blak eletriit ould be designed to attain te target on blak eletriit but onl b ane attain te green target i.e. deending on a seifi onstellation of arameters. Hene normall two targets all for two instruments. Still one ma wonder weter a TGC sstem alone wit an announed erentage requirement of / ould attain te two targets. Te answer is tat it will generall not. To see tis onsider equation 9. From tis we ave 19

23 18 1. TGC TGC TGC From 6 we also ave TGC TGC and tat TGC 1 TGC. To see tat generall TGC TGC TGC al 17 to obtain Hene we see tat onl if: 1 will TGC TGC TGC. Oterwise if: 1 ten TGC TGC TGC and if: 1 ten TGC TGC TGC. Searing for two instruments tat ma otimall attain te two targets a ombination of a ta and a subsid seems to be a natural oie. Denoting te ta b and te subsid b ẑ te otimiation roblem reads ma Te first order onditions related to tis roblem is ˆ Clearl b setting and te above first order onditions are seen to be idential to te soial otimalit onditions. Hene we must ave and i.e. te ombination of a ta and a subsid ma otimall aieve te targets on blak and green eletriit Disussion Te main message of tis aer is tat ea kind of environmental target as a single otimal instrument and tat tere is a deadweigt loss of using oter instruments to 14 It turns out tat a ombination of a TGC-sstem and a ta ma also aieve te targets simultaneousl if te erentage requirement is set to / and te ta is equal to. /1

24 aieve te target. See summar of results in Table 1..Yet man ountries al instruments tat are not otimal in relation to te stated targets. For eamle Norwa uses a sstem of tradable green ertifiates jointl wit Sweden to attain a quantit target of new aait installation of green eletriit. 15 Clearl aording to te analsis it would be better to use a feed-in sstem. Furtermore Denmark uses a feedin remium sstem finaned b a PSO 16 sstem to basiall attain a sare target on renewables 17. From te analsis it would be better to use an allowane sstem based on tradable ertifiates. However man ountries ave not onl one limate related target but several targets tat te seek to attain b using several instruments at te same time. 18 Tis raises te question as to wat te uroses of te targets are and wi market failures te are intended to address. Table1. Otimal solutions of aling various instruments to aieve various targets Allowanes: TGC Green subsid: Sare target: Green target: Blak target: TGC TGC TGC TGC Blak ta: TGC TGC TGC TGC TGC TGC TGC TGC Te stated uroses for adoting te various regulator instruments ma be man and range from te regulation of market failures to environmental reservation job 15 Te joint Norwegian-Swedis target is to attain new renewable aait of 8.4 T b. 16 Te Danis feed-in remium sstem amounts to giving new renewable energ - mainl offsore wind ower rojets - a guaranteed rie i.e. if te wolesale rie of eletriit is low te neessar feed-in remium will be ig and vie versa. Te sstem is finaned b a PSO Publi Servie Obligation sstem tat arges te eletriit onsumers wit a varing unit fee to be aid over te eletriit bill. Te fee varies wit te wolesale rie of eletriit. However Denmark is about to abandon te PSO-sstem beause te EU as determined tat te PSO sstem gives rise to unfair ometition wit reset to foreign eletriit roduers. 17 For Denmark s target for renewables is 3 erent out of total energ use. 18 For instane towards all member states of te EU as to fulfill a ountr seifi sare target for renewables as well as fulfill a erentage target on te redution of greenouse gases in te non- ETS setors of te eonom. For te 3 oli te ountr seifi targets on te sare of renewables will be abandoned. In addition to tis te ave to artiiate in te joint ETS-sstem. Also te EU as a ommon target on energ savings tat te member states ave to address. 1

25 reation and innovation wit a onsideration of distributional equit and olitial feasibilit eitman 1974; Goulder and Parr 8; Fiser and Preonas 1. ile te target of reduing te generation of fossil energ is well founded b te market failure related to limate ange it is not equall obvious w one needs seifi targets on sares of renewables and on quantities of green energ and on energ savings as in te EU. As illustrated b te analsis it is true tat a target on te sare of green eletriit or a seifi inrease of te quantit of green eletriit ma orresond to a given redution of blak eletriit wen TGCs and subsidies are alied. However if te main objetive is to redue te generation of blak eletriit ten a Pigouvian ta or an emission ermit sstem would be better. It sould also be noted tat a Pigouvian ta on blak eletriit will itself lead to an inrease of te sare of green eletriit as well as of te quantit of green eletriit generated. Te question ten is weter tere are oter kinds of market failures tat are taken are of b te sare target and te target of eanding te quantit of green eletriit. One argument frequentl eard is tat subsidies on green energ will reate new jobs and give a ountr tat engage in su a ratie a first mover advantage in develoing a green industr tat ma grow into a rofitable eort industr. However lak of jobs and unrofitable industries are not normall a result of a market failure in te roer meaning of te term i.e. a failure tat not even a erfet ometitive organiation of te market will make go awa but rater of sort and intermediate term eonomi situations. Anow if te target is to stimulate te emloment it would be better to use more general eonomi instruments e.g. budgetar and monetar oliies rater tan to give subsidies to seifi industries. Along te same lines subsidies are onsidered benefiial as te are assumed to stimulate te resear and develoment of new green tenologies. In art tis is true and tere is a basi eonomi argument for w te government sould romote resear. Tenologial rogress benefits all and not onl tose wo make te inventions and develo te tenolog but also te rest of te eonom tat adots te new tenologies. Hene soiet is benefitted troug so-alled knowledge sillover effets. see e.g. Jaffe 1986 Jaffe et al Terefore tere is a danger tat

26 too little resear would take lae if resear is left to te rivate setor alone ating onl in teir own interest witout onsidering te ositive sill-over effets to soiet. However stimulation of resear is good for an new tenologial develoment not onl witin te energ setor. Furtermore te subsidies for green energ are also given to roduers making use of establised tenologies were te argument of stimulating sill-over effets is no longer valid. Hene tis is an argument for general subsidies to resear and not for suort of a seifi industr as su. 19 Furtermore it sould be noted tat a Pigouvian ta on fossil based eletriit also will stimulate resear in renewable energ troug so-alled indued tenologial ange see e.g. Newell et al Po and Goulder and Matai. Yet anoter argument ut forward for aving targets on sares of renewables and of subsidiing green energ is tat tese targets ma inrease te seurit of sul. Te oint is tat a ountr wit a large deenden on imorted fossil energ oal oil and natural gas is ver vulnerable if te sul of energ sould disaear or beome onsiderabl redued witin a sort interval of time. Su soks ma ave a sieable negative effet on te eonom just as it aened after te OPEC oi1 embargo in 1973/74 see Kilian 8 9 and Lösel et al. 1 Te resulting inrease of energ ries following from a sul ok of te mentioned kind ma be amlified b imerfetions in oter markets e.g. te labour market and give rise to onsiderable negative effets on te eonom see Baumeister et al. 1 Stimulating te generation of green energ witin te ountr as well as diversifing te use of energ tes ossibl b trade ma lessen te deenden and inrease te seurit of sul. However unertain and sort time flutuating energ ries as su do not neessaril all for governmental intervention in te energ setor. Unertain and sort time flutuating ries are tial for man traded inuts and goods and in general te government ma deal wit te more severe onsequenes of su roblems b making use of budgetar oliies to stabilie te eonom rater tan to intervene in te energ market itself. 19 A stud of te knowledge sillover effets from rivate resear in Denmark investigated weter su sillover effets were larger witin te energ setor tus alling for larger subsidies as omared wit oter setors of te eonom Bjørner and Maenauer 11. Te stud found tat tis was not te ase. In fat te stud suggested tat te sillover effets were lower for te energ setor. 3

27 Furtermore anoter meaning of te term seurit of sul needs to be mentioned namel te degree of wi one an make sure tat te ligt will sta on. In tis sense te inreasing deenden on intermittent ower i.e. from wind energ will worsen te seurit of sul situation witin te eletriit setor rater tan imroving it Hirt 15. Te inreasing sare of renewable energ in eletriit generation will indue additional osts in terms of inreased reserve aait tat an be ramed quikl ossibl troug new aait markets see e.g. Cramton et al. 13. Te fat tat man ountries ursue several targets weter te are eonomiall well founded or not imlies tat several instruments must be alied in order to aieve a maimal soial surlus given te attainment of tese targets. Just as te number of indeendent linear equations must be equal to te number of unknowns in a uniquel determined equation sstem te number of instruments sould ideall be equal to te number of targets see Tinbergen Instruments and targets are interonneted in te sense tat ea instrument ma affet all targets and onsequentl ea target ma be affeted b all instruments. Some of te instruments ma be omatible wile oters ma be outrigt ounterative e.g. subsidiing green eletriit will el reaing te sare target for renewables but will at te same time run ounter to a target of inreasing energ savings troug te rie lowering effet. Also targets ma temselves be inomatible e.g. te target on renewable eansion and te target of fossil energ redution ma not neessaril orresond to te sare target. It sould be stressed tat if te single overriding target is to redue te emission of greenouse gases from using fossil energ and te oter targets are set wit te intention to romote tis suerior target ten learl tere will be a soial loss from using several instruments to also attain te subordinate targets i.e. too man irrelevant onstraints. Tis does owever not mean tat it is alwas bad to use several instruments to attain a single target. As sown b e.g. Roberts and Sene 1976 and Kwerel 1977 it ma be otimal from te oint of view of soiet to Indeed tis is true for man ountries around te world inluding te USA Cina and India. 1 More reisel Jan Tinbergen s rule an be stated in te following wa: Te number of goals a olimaker an ursue an be no greater tan te number of instruments te olimaker an ontrol. 4

28 ombine a ertifiate sstem wit an additional instrument su as floor and eiling ries a so-alled brid sstem wen faed wit unertaint. Also more reentl Pier 3 Jaob and Ellerman 4 Burtraw and Palmer 6 Goulder and Parr 8 sow ow a sstem of safet valves eilings and floors ries under unertaint ma inrease te effiien of a dnami emissions ertifiates sstems tat allows banking. Oterwise te reasons for aling several instruments even toug onl te target of fossil energ redution is at te forefront ma generall be found witin te realm of olitial eonom. For eamle a art of te arbon ta burden ma be taken awa from te fossil intensive industries if subsidies to green energ do a art of te job of reduing te emission of CO. Hene te ombination of instruments is not artiularl ost effetive but it is an answer to a olitial wis of distributional equit and ossibl also to ideas of green job reation and first mover advantages Goulder and Parr Summar and onlusion In order to attain a given limate related target a soial lanner ma oose among several instruments. Using a standard analti model for an eletriit market tis aer verifies tat ea kind of target i.e. target on blak or green eletriit generation; or erentages of te two as onl a single effiient instrument under ertaint and tat tere is a deadweigt loss of using oter instruments to aieve te target. it te same logi te aer onfirms tat several simultaneous targets on green and blak eletriit generation all for several instruments. In artiular it is sown tat a sstem of tradable green ertifiates annot generall alone attain simultaneous targets on blak and green eletriit generation. Generall it is a roblem tat man ountries use instruments tat are not otimal for te stated targets werefore tere is a loss in terms of wasted resoures. Te logi of tis result is reentl adoted in te Market Stabilit Reserve of EU ETS beoming ative as of Januar 19. Aording to tis meanism EU ETS quotas will enter into a reserve if quota ries tends to go below a floor rie wile quotas from te reserve will be released if te quota rie tends to rise above a given rie a. 5

29 Tis aer also disusses te relevane of te various limate targets tat a ountr ma ave i.e. wat kind of market failure te are intended to deal wit. Te disussion reveals tat te eonomi rationales for te stated targets are not at alwas obvious. Te aer also oints out tat tere is loss to soiet of tring to aieve targets tat are irrelevant as omared wit an overriding target e.g. to urtail te emission of greenouse gases. Literature Amundsen E.S. and J.B. Mortensen 1 Te Danis Green Certifiate Sstem: some simle analtial results. Energ Eonomis Amundsen E.S. and J.B. Mortensen Erratum to Te Danis Green Certifiate Sstem: some simle analtial results. [Energ Eonomis ]. Energ Eonomis Amundsen E.S. M. Baldursson and J.B. Mortensen 6 Prie volatilit and Banking in Green Certifiate Markets. Environmental and Resoure Eonomis 35: Amundsen E.S and G. Nese 9 Integration of tradable green ertifiate markets: at an be eeted? Journal of Poli Modeling Baumeister C G. Peersman and I. Van Robas 1 «Te Eonomi Consequenes of Oil Soks: Differenes Aross Countries and Time in Fr Jones and Kent eds. Inflation in an Era of Relative Prie Soks. Reserve Bank of Australia Bjørner T.B. and J. Maenauer 11 Estimation af sillover-effekter af energiforskning og anden rivat forskning. De Økonomiske Råd orking Paer 11:1. Burtraw D. and K. Palmer 6 Dnami Adjustment to Inentive Based Environmental Poli to Imrove Effiien and Performane DisussionPaer Resoures for te Future asington DC. Böringer C. and K.E. Rosendal 1: Green Serves te Dirtiest. On te Interation between Blak and Green Quotas Journal of Regulator Eonomis California Government 15 SB-35 Clean Energ and Pollution Redution At of 16 California Legislative Information. 6

30 Cramton P. A Okenfels and S. Stoft 13 Caait Market Fundamentals Eonomis of Energ & Environmental Poli Vol. Issue Dressler L. 16 Suort semes for renewable eletriit in te Euroean Union: Produer strategies and ometition Energ Eonomis Vol Ellerman D F. Conver and C. de Pertuis 1 Priing Carbon: Te Euroean Union Emissions Trading Seme Cambridge Universit Press. EU-Commission 1 Energ : A strateg for ometitive seure and sustainable energ COM EU-Commission 1 Res Legal: Legal soures on renewable energ EU- Commission 14 A oli framework for limate and energ in te eriod from to 3 COM Fiser C 9 Renewable Portfolio Standards: en Do Te Lower Energ Pries? Te Energ Journal 31 No Fiser C. and L. Preonas 1 Combining Poliies for Renewable Energ: Is te ole Less tan te Sum of Its Parts? International Review of Environmental and Resoure Eonomis 4: Goulder L.H. and K. Matai Otimal CO Abatement in te Presene of Indued Tenologial Cange. Journal of Environmental Eonomis and Management Goulder LH Parr I 8 Instruments oie in environmental oli Resoures for te Future. Disussion Paer 8-7 asington DC Hirt L. 15 Te Otimal Sare of Variable Renewables Te Energ Journal Vol. 36 No Jaob H.D. and A.D Ellerman 4 Te Safet Valve and Climate Poli Energ Poli Jaffe A.B Tenologial Oortunit and Sillovers of R&D: Evidene from Firms Patents Profits and Market value. Te Amerian Eonomi Review Jaffe A.B. M. Trajtenberg and R. Henderson 1993 Geograi Loaliation of Knowledge Sillovers as Evidened b Patent Citations. Te Quarterl Journal of Eonomis

31 Kilian L. 8 Te Eonomi Effets of Energ Prie Soks Journal of Eonomi Literature Kilian L. 9 Not All Oil Prie Soks are Alike: Distangling Demand and Sul Soks in te Crude oil Market Amerian Eonomi Review Kwerel E To tell te trut: imerfet information and otimal ollution ontrol. Review of Eonomi Studies Lösel A. U. Moslener and D.T.G Rübbelke 1 Energ Seurit Conets and Indiators Editorial Energ Poli Meran G. and N. ittmann 1 Green Brown and Now ite Certifiates: Are Tree One Too Man? Environmental and Resoure Eonomis 53: Nese G. 3 Essas in Liberalied Energ Markets Dotoral dissertation Deartment of Eonomis Te Universit of Bergen. Newell R.G. A.B. Jaffe and R.N. Stavins 1999 Te Indued Innovation Hotesis and Energ-saving Tenologial Cange. Te Quarterl Journal of Eonomis RobertsM.J. and M. Sene 1976 Effluent Carges and Lienses under unertaint. Journal of Publi Eonomis Pier. Combining Prie and Quantit Controls to Mitigate Global Climate Cange Journal of Publi Eonomis 85: Po D. Indued Innovation and Energ Pries. Te Amerian Eonomi Review Tinbergen J On te Teor of Eonomi Poli. Nort-Holland Pub. Co. Traber T. and C. Kemfert 9 Imats of te German Suort for Renewable Energ on Eletriit Pries Emissions and Firms Te Energ Journal 3 No Unger T. and E.O. Algren 5 Imats of a ommon green ertifiate market on eletriit and CO emission markets in te Nordi ountries Energ Poli eitman M Pries vs quantities Te Review of Eonomi Studies 41 No

32 Aendi: A simle illustrative model wit numbers Assumtions: a b k g were a b k g are all stritl ositive onstants. For otimiation roblems and first order onditions see main tet. Solution: No targets ak gb a 1 b g 1 b k b b 1 b k b b Target: a given sare of green eletriit. Otimal soial solution: a g 1 1 k b a g 1 k b Using a TGC sstem: a g 1 1 k TGC b a g 1 k TGC s k 1 g b a g 1 k b Using a subsid: a 1 1 b k 1 a 1 b g 1 b a 1 b Using a ta: 1 a g k b k 1 a 1 b g k b a g k b Target: a given level of green eletriit. Otimal soial solution: a b 1 b 1 Using a TGC sstem: TGC TGC quadrati equation Using a subsid: a b 1 b k g1 b b a 1 b : numeriall determined 9

33 Using a ta: a b k g b b bk k 1 b g a b Target: a given level of blak eletriit. Otimal soial solution: Using a TGC sstem: quadrati equation Using a subsid: TGC a g b b k a 1 b b 1 TGC : numeriall determined ak bg b bk b k Using a ta: a g b b k a g b k b k Table A. Eamle: Otimal solutions of aling various instruments to aieve various targets Soial otimum Allowanes: TGC Sare target: 6 Green target: 5 Blak target: 6 54 TGC 6 31 TGC s 46 3 TGC TGC TGC 847 TGC s TGC 5 TGC s 47 6 TGC Green subsid: Blak ta: No targets: Parameter values alied: a 1 b 1 k g 5 3