Environmental Economics and Policy Studies

, Volume 14, Issue 1, pp 23–34

How do electoral competition and special interests shape the stringency of renewable energy standards?

Authors

    • Department of Political ScienceColumbia University
Research Article

DOI: 10.1007/s10018-011-0020-4

Cite this article as:
Urpelainen, J. Environ Econ Policy Stud (2012) 14: 23. doi:10.1007/s10018-011-0020-4

Abstract

In this article, I provide a new political rationale for stringent renewable energy standards, such as portfolio requirements and feed-in tariffs. A game-theoretic analysis demonstrates that if a green politician (concerned about environmental quality) adopts a stringent renewable energy standard, thus creating artificial profits for the renewables industry, she can induce the industry to support her in elections. This political mobilization improves the green politician’s electoral fortunes, and thus increases the probability that the renewable energy standard will be implemented. In contrast to previous arguments for renewable energy standards, my argument applies even when the renewables industry is disorganized at the time of environmental policy formation.

Keywords

Renewable energySpecial interestsPolicy instrumentsGame theoryPolitical economy

JEL Classification

L50Q54Q58

1 Introduction

Renewable energy standards are an increasingly common policy instrument (Lyon and Yin 2010; Mendonça 2007). They increase the use of renewable energy either by dictating that utilities generate some proportion of their production from renewables, or by requiring that they pay a premium above the market price for renewable energy. What determines the adoption and stringency of renewable energy standards in different jurisdictions? To what extent do they reflect political considerations?

In this article, I investigate the political economy of renewable energy standards. A game-theoretic analysis demonstrates that a green politician (someone interested in improved environmental quality) may reap electoral benefits from a stringent standard. Since the standard increases profits to the renewables industry, this industry has stronger incentives to mobilize support for the green politician in subsequent elections. By doing so, the industry increases the probability that the standard will be implemented in the future.

Notably, the result applies even if the green constituencies are initially weak and disorganized. The fossil-fuel lobby is powerful and organized in many countries, so it will systematically resist all efforts to promote renewable energy. The renewables industry remains immature, and therefore faces a higher cost of organizing and mobilizing than the fossil-fuel industry. Consequently, a renewable energy standard that artificially increases profits may be necessary to induce the initially weak and disorganized green constituencies to pay the high up-front cost of organizing and mobilizing. It is as though the renewable energy standard helped to correct the imbalance in favor of the established interest groups in support of fossil fuels.

To illustrate, consider the United States. In 1998, the entire industry spent only USD2.4 million to lobby for favorable public policies. In 2009, the total expenditures had risen to USD30 million. 1 This dramatic increase follows temporally the diffusion of renewable energy standards and the expansion in total renewable energy production. By creating an increasingly powerful renewables industry, state governments may have given clean energy enthusiasts a sustained presence in Washington. President Obama’s decision to allocate USD60 billion in green stimulus will also probably facilitate this development. 2

In addition to illuminate the political economy of renewable energy standards, this article offers useful insights for policymakers. While the public debate on climate and energy policies often focuses on economic and environmental criteria, such as effectiveness and equity, this article shows how green politicians can use public policies to mobilize supporters who then help consolidate these public policies. This positive feedback loop can help to consolidate effective climate and energy policies. To trigger it, however, policymakers must understand how a given policy influences the degree of political mobilization among supporters and opponents.

2 Renewable energy standards

By renewable energy standards, I refer to two different policy instruments that enhance the competitiveness of renewables. First, portfolio standards require that some proportion of total energy consumption in a jurisdiction, such as a country or province, be produced from renewable sources. For example, a portfolio standard can be implemented by requiring that all electric utilities derive some percentage of the power that they sell to consumers from renewables producers. Second, price standards prescribe a price floor for renewable energy. For instance, the 1990 German legislation Stromeinspeisungsgesetz required that electric utilities purchase power from renewables producers at a price higher than the market average for other energy sources. Thus, all renewables producers who could profitably sell power at the specified prices had an incentive to do so. This particular policy is often referred to as a feed-in tariff.

Renewable energy standards are a common policy instrument in many countries. In December 2009, 41 states had adopted some kind of a compulsory standard in the United States, mostly portfolio standards. 3 As documented by Rabe (2008), the adoption of renewable energy standards began well before the climate policy made it to the federal policy agenda. Texas, a state dominated by oil and coal producers, adopted a standard as early as in 1999.

In Europe, price standards, usually in the form of a feed-in tariff, have been the most important policy in support of renewable energies (Mendonça 2007). For example, it has been successfully used in Germany and Spain, both now among the most important producers of wind and solar energy in the world. Additionally, several countries—including the Belgium, Poland, and the United Kingdom—have applied a portfolio standard. Most recently, the European Union committed to producing one fifth of all energy consumed from renewable sources by 2020. 4 This commitment is essentially a unionwide renewable energy standard that allows each member state some flexibility in implementation.

The economic literature generally emphasizes the benefits of economywide policy instruments, such as carbon taxes, and thus casts doubt on the utility of renewable energy standards. Palmer and Burtraw (2005) investigate the cost-effectiveness of various policy designs, comparing their welfare effects to emissions trading. They find that “if the primary goal of policy is to reduce carbon emissions, then a carbon cap with broad-based allowance distribution is the more cost-effective policy” (Palmer and Burtraw 2005, p. 891). Similarly, Fischer and Newell (2008, p. 160) find that emissions pricing is ideal “for reducing emissions, since it simultaneously gives incentives for fossil energy producers to reduce emissions intensity, for consumers to conserve, and for renewable energy producers to expand production and to invest in knowledge to reduce their costs.”

Nonetheless, the literature offers several potential rationales for renewable energy standards. First, they could be useful in reducing barriers to entry for immature energy technologies. As Unruh (2000) argues, the energy system is subject to unusually high barriers to entry, so commercializing energy technologies can be difficult even if they are very promising. Through aggressive support for renewables, a government can try to overcome these barriers to entry (Heinzel and Winkler 2011). While such economywide measures as a carbon tax or emissions trading allow societies to minimize the cost of pollution abatement, they may sometimes fail to trigger truly new innovations in the energy technology sector (Fischer and Newell 2008).

According to political economists, renewable energy standards could be politically lucrative if clean energy producers are already organized as a powerful interest group (Aidt and Dutta 2004; Buchanan and Tullock 1975; Keohane et al. 1998). Since such standards discriminate against other means to reduce emissions, the demand for renewables increases disproportionately. Unless entry to renewables production is perfectly free, the increase in demand will create rents for existing clean energy producers. 5 Consequently, they may offer campaign contributions to the government in exchange for a renewable energy standard. More generally, in the economics literature scholars have emphasized the possibility that direct regulation may produce rents for incumbents (Campos 1989; Oye and Maxwell 1994; Peltzman 1976; Stigler 1971). According to Kawahara (2011), governments may also use environmental policies as a “second best transfer” instead of direct income transfers to prevent uninformed voters from recognizing the incumbent’s willingness to transfer rents to special interests.

While these arguments are generally powerful, they have limited explanatory power for the creation of new industries that are initially weak and disorganized. In this article, I show how regulatory instruments may emerge even if the incumbents supporting them face a high cost of political mobilization. My analysis offers a new rationale for relatively stringent standards in situations wherein conventional models would not predict them due to high economic costs and the absence of a strong supporting lobby.

3 Model

In the game that I analyze, a green politician is initially in power. She selects the level of renewable energy standards. Following this choice, elections are held. The green politician may be replaced by a brown politician who is not interested in environmental protection. The outcome of the elections also depends on the lobbying efforts of a renewables industry and a fossil-fuel industry. These profit-motivated interest groups select their lobbying efforts in view of the renewable energy standard that the green politician has chosen.

The sequence of the moves is the following:
  1. 1.

    The green politician chooses a renewable energy standard\(S\in[0,1]. \)

     
  2. 2.

    The renewables and fossil-fuel industries select mobilization levels\(M_{\rm R},M_{\rm F}\in[0,\infty). \)

     
  3. 3.

    Elections are held to determine whether the green politician remains in power or is replaced by a brown politician, \(E\in\{G,B\}. \)

     
  4. 4.

    The new government decides on implementing the standard, \(P(S)\in\{0,1\}. \)

     
  5. 5.

    Producers produce, consumers consume.

     

The level of S can be interpreted as the stringency of the standard. For simplicity, I focus here on a portfolio standard, though a similar model for price standards is easily constructed. The minimal level S = 0 indicates that energy utilities need not use renewables, whereas the maximal level S = 1 indicates that energy utilities can only use renewables.

The two industries observe the level S, and then simultaneously decide how much to invest in mobilization to support their preferred candidate. The renewables industry prefers the green politician, for reasons examined below, while the fossil-fuel industry prefers the brown industry. To reduce notation, the cost of lobbying for industry i = RF is linear. Without loss of generality, it is normalized to Mi, so that the marginal cost is fixed at unity.

A key difference between the two industries is the fixed cost of lobbying. The fossil-fuel industry is established, so it need not pay a fixed cost of lobbying. By contrast, the renewables industry is initially weak and disorganized. Thus, it must pay a fixed cost Q > 0 to select a non-zero level of lobbying. This fixed cost, it turns out, plays a key role in the green politician’s choice of a renewable energy standard.

The green politician wins the elections with probability λ = λ(MF, αMRU). In this expression, α > 0 reflects the renewables industry’s lobbying ability relative to fossil fuels. The third term, U, reflects relative social welfare if the green politician wins the elections, as compared to the baseline of a brown politician. This term is discussed in greater detail below. Assume λ is strictly increasing in αMR and U, but strictly decreasing in MF. Suppose further that the second derivatives with respect to αMR and U are negative, the second derivative with respect to MF is positive, and the Inada conditions hold. To reduce notation, suppose all cross-derivatives are zero.

After the elections are held, the new government decides on implementing the standard. The brown politician obtains a strictly negative payoff from any standard, so she will always choose not to implement. The green politician obtains a strictly positive payoff from any standard, so she will always implement. This is why the industries prefer different politicians. These payoffs are described in greater detail below.

The economic structure of the game is the following. The cost of producing xF units of energy from fossil fuels is C(xF), an increasing and strictly convex function. The cost of producing xR units of energy from renewables is βC(xM), where β > 1 reflects the cost disadvantage of renewable energy. For simplicity, suppose renewable energy is costly enough such that none is purchased in the absence of a standard: βC′(0) > C′(1). The level zero should be thought of as a normalization. A literal interpretation of this condition would imply that no renewables industry could exist in the absence of a standard, and this would obviously prevent lobbying by the renewables industry. But if the level zero is interpreted as some status quo consumption that does not depend on the standard—perhaps because some fixed amount of renewable energy can be produced in conducive circumstances without public policies—the paradox disappears.

These assumptions indicate that the model focuses on situations wherein entry into the energy sector is limited, so that marginal costs are not constant. According to the literature on the energy sector, this is a relatively plausible assumption, at least in the short and medium run (Cowan 1990; Unruh 2000; Arthur 1989). If the assumption did not hold, then the renewables industry would not lobby because new entrants would dissipate all profits.

This assumption is also important for the main findings. If entry into the renewables sector were completely free and costless, for instance, the incumbents in the renewables industry would not lobby for a standard. In a perfectly competitive markets, lobbying cannot increase profits. Thus, the model and the results depend on the plausible assumption that some barriers to entry remain, and incumbents’ profits thus depend on policy.

To simplify, suppose that a representative consumer’s demand for energy is completely inelastic, so that she will always purchase one unit of energy. This unit of energy produces value worth V > 0. This assumption is of course a strong one, but it simplifies the analysis without loss of essential insight. Given that she must purchase a proportion S from renewables, and renewables carry a higher marginal cost, βC′(0) > C′(1), her true marginal cost is (1 − S)C′(1 − S) + SβC′(S) for any standard S given that the total consumption is x = 1.

Profits from fossil fuels are given by \(\pi_{\rm F}=(1-S)p_{\rm F}^{*}-\int_{0}^{1-S}C'(x)\,{\text{d}}x\) and profits from renewables are given by \(\pi_{\rm R}=Sp_{\rm R}^{*}-\int_{0}^{S}C'(x)\,{\hbox{d}}x, \) where pi* is the equilibrium price of energy from source i = RF. It is easy to see that as S increases, pF* and πF decrease while pR* and πR increase. Thus, the fossil-fuel industry prefers to minimize S while the renewables industry prefers to maximize it.

Renewable energy reduces pollution, so suppose a standard S brings an environmental benefit of BS, where B > 0 denotes the marginal value of pollution abatement. The linearity assumption is not required for any of the results, but it simplifies notation. Social welfare is given by \(BS+V-\int_{0}^{1-S}C'(x)\,{\hbox{d}}x-\int_{0}^{S}\beta C'(x)\,{\hbox{d}}x. \) Under standard regularity conditions, this welfare is maximized at some interior level \(S^{\rm max}\in(0,1), \) where Smax meets U′(Smax) = 0.

We are now in a position to examine the elections is greater detail. The brown politician always rejects the standard, so the baseline social welfare under her rule is \(V-\int_{0}^{1}C'(x)\,{\hbox{d}}x, \) as all energy comes from fossil fuels. The green politician gives \(BS^{*}+V-\int_{0}^{1-S^{*}}C'(x)\,{\hbox{d}}x-\int_{0}^{S^{*}}\beta C'(x)\,{\hbox{d}}x. \) Under standard regularity conditions, the difference between the two values, U(S), peaks at Smax.

Consider finally the politicians’ payoffs. For one thing, each is interested in political survival, and thus obtains a bonus Y > 0 if she remains in power after elections. The brown politician prefers fossil fuels, so she obtains a negative payoff −S from standard S. This is why she never implements it if elected. The green politician values the environmental benefits of the standard, so she obtains BS if standard S is implemented. Thus, the green politician’s expected payoff from the game is \(\lambda\cdot(Y+BS). \)

4 Equilibrium

The subgame-perfect equilibrium of the game can be found through backward induction. In equilibrium, the green (brown) politician implements any (no) standard S* > 0. The fossil-fuel industry and renewables industry condition their mobilization levels, MF and MR, on the equilibrium standard S*. The green politician’s choice of standard S in the beginning of the game must maximize her expected payoff.

The economic outcome and implementation decisions are already described above, while the elections are determined by nature, so consider the mobilization decisions. Given a proposed standard S, the fossil-fuel industry’s expected payoff is
$$ \lambda(M_{\rm F},M_{\rm R},U(S))\pi^{\rm F}(S)+[1-\lambda(M_{\rm F},M_{\rm R},U(S))]\pi^{\rm F}(0)-M_{\rm F}. $$
In equilibrium, we must thus have
$$ -\frac{\partial\lambda}{\partial M_{\rm F}}(\pi^{\rm F}(0)-\pi^{\rm F}(S))=1, $$
(1)
a condition that holds for a unique MF*(S) in an interior equilibrium. Each unit of mobilization slightly increases the probability that the fossil-fuel industry obtains πF(0) instead of πF(S), while the marginal cost is 1. As usual, the marginal benefit must equal the marginal cost.
The renewables industry only mobilizes if it is worth paying the fixed cost Q. The payoff from not mobilizing is
$$ \lambda(M_{\rm F}(S),0,U(S))\pi^{\rm R}(S)+[1-\lambda(M_{\rm F}(S),0,U(S))]\pi^{\rm R}(0). $$
If the renewables industry does not mobilize at all, the optimal level of mobilization is given by a condition similar to the condition for the fossil-fuel industry, (2). With πR(0) = 0, this condition can be written as
$$ \frac{\partial\lambda}{\partial M_{\rm R}}\pi^{\rm R}(S)=1, $$
(2)
and it holds for a unique MR*(S) in an interior equilibrium.
The payoff from mobilizing is thus
$$ \lambda(M_{\rm F}^{*}(S),M_{\rm R}^{*}(S),U(S))\pi^{\rm R}(S)+[1-\lambda(M_{\rm F}^{*}(S),M_{\rm R}^{*}(S),U(S))]\pi^{\rm R}(0)-M_{\rm R}^{*}(S)-Q. $$
For any standard S, the renewables industry thus mobilizes if and only if Q falls below some threshold \(\tilde{Q}(S). \) Similarly, let \(\tilde{S}(Q)\) denote the lowest standard that induces the renewables industry to mobilize for a given Q.

By backward induction, consider now the prior choice of the standard S. This is a standard constrained optimization problem, so we must consider both interior and corner solutions. Four candidates for a solution to this optimization problem exist. First, the green politician could select 0 to avoid any lobbying and obtain an expected payoff of λ(0, 0, 0)Y. A necessary (but not sufficient) condition for this choice is that the derivative of \(\lambda(\cdot)\cdot(BS+Y)\) with respect to S is non-positive at S = 0.

Second, the green politician could select the optimal level conditional on the renewables industry not mobilizing. Optimization yields a standard Sno and a payoff λ(MF(Sno), 0, U(Sno))(BSno + Y). This candidate can be rejected if the derivative of \(\lambda(\cdot)\cdot(BS+Y)\) with respect to S is strictly positive for all S such that \(S\leq\tilde{S}. \)

Third, the green politician could select the optimal level such that the renewables industry is indifferent between mobilizing and not mobilizing. This yields \(\lambda(M_{\rm F}(\tilde{S}),M_{\rm R}(\tilde{S}),U(\tilde{S}))(B\tilde{S}+Y). \) This candidate requires that the derivative of \(\lambda(\cdot)\cdot(BS+Y)\) with respect to S be non-positive at \(S=\tilde{S}, \) yet the total payoff is higher than at Sno.

Finally, the green politician could select an interior optimal standard such that the renewables industry mobilizes. This yields λ(MF(Syes), MR(Syes), U(Syes))(BSyes + Y), and it is required that the derivative of \(\lambda(\cdot)\cdot(BS+Y)\) with respect to S be strictly positive at \(S=\tilde{S}.\)

5 Results

This equilibrium analysis allows me to analyze the green politician’s choice of renewable energy standards. The following three propositions establish the main findings.

Proposition 1

Let S0 denote the green politician’s optimal standard without any mobilization, MF = MR = 0. If the renewable industry’s fixed cost Q is sufficiently high, the green politician’s choice S* is lower than the standard S0 in the absence of any mobilization, S* < S0.

Proof

With \(Q\rightarrow\infty, \) no renewable energy standard \(S\in[0,1]\) would suffice to mobilize the renewables industry. Consider now the green politician’s equilibrium choice of renewable energy standard given that MR* = 0. The green politician’s choice in the absence of mobilization, S0, is implicitly characterized by
$$ \frac{\partial\lambda(\cdot)}{\partial U}\frac{\partial U(S^{0})}{\partial S}(BS^{0}+Y)+\lambda(0,0,U(S^{0}))B=0 $$
in an interior equilibrium. If the fossil-fuel industry mobilizes, the optimum must be such that
$$ \left[\frac{\partial\lambda(\cdot)}{\partial U}\frac{\partial U(S^{0})}{\partial S}+\frac{\partial\lambda(\cdot)}{\partial M_{\rm F}}\frac{\partial M_{\rm F}(S)}{\partial S}\right](BS^{*}+Y)+\lambda(M_{\rm F}^{*},0,U(S^{*}))B\leq0, $$
with equality unless S* = 0. Given that \(\frac{\partial\lambda(\cdot)}{\partial M_{\rm F}}\frac{\partial M_{\rm F}(\cdot)}{\partial S}<0\) everywhere, it follows that S* < S0.□

This proposition shows the outcome when the fossil-fuel lobby is dominant. If the renewables industry is so weak that it simply cannot organize effectively, the fossil-fuel industry can operate effectively. In this case, even a green politician must moderate to avoid aggressive lobbying by the fossil-fuel industry.

For comparative purposes, suppose next that the renewables industry is on an equal playing ground.

Proposition 2

If the renewables industry’s fixed cost Q is sufficiently low, the green politician’s choice S* is higher (lower) than that without any mobilization, S0, whenever α is high (low) enough.

Proof

The level of S0 is characterized in the proof of Proposition 1. Consider now S*. With \(Q\rightarrow0, \) the renewables industry will mobilize in equilibrium for any interior standard \(S\in(0,1). \) Given that both industries mobilize, the green politician’s first-order condition is
$$ \left[\frac{\partial\lambda(\cdot)}{\partial U}\frac{\partial U(S)}{\partial S}+\frac{\partial\lambda(\cdot)}{\partial M_{\rm F}}\frac{\partial M_{\rm F}(S)}{\partial S}+\alpha\frac{\partial\lambda(\cdot)}{\partial M_{\rm R}}\frac{\partial M_{\rm R}(S)}{\partial S}\right](BS^{*}+Y)+\lambda(M_{\rm F},0,U(S))B\leq0. $$
With \(\frac{\partial\lambda(\cdot)}{\partial M_{\rm F}}\frac{\partial M_{\rm F}(\cdot)}{\partial S}<0\) and \(\frac{\partial\lambda(\cdot)}{\partial M_{\rm R}}\frac{\partial M_{\rm R}(\cdot)}{\partial S}>0\) everywhere, we have S* < S0 whenever α falls strictly below some threshold \(\tilde{\alpha}\in(0,\infty)\) and S* > S0 whenever it is strictly higher than this threshold.□

If the fossil-fuel and renewables industries are able to mobilize on a relatively equal playing ground, the standard logic of competition between interest groups holds (Becker 1983; Grossman and Helpman 1994). Their relative ability to lobby determines whether the standard is more or less stringent than the one that would be optimal in the absence of special interests.

Consider finally the most interesting case, one in which the fixed cost Q obtains an intermediate value. Is it possible that the green politician selects a high level of S* to mobilize the renewables industry?

Proposition 3

Let Q be so high that the renewables industry does not mobilize at Scond, where Scond is the optimum given Q = 0. If \(\tilde{S}-S^{cond}\) is low enough, the green politician selects \(S^{*}\geq\tilde{S}. \)

Proof

The payoff from S* = Scond is given by λ(MF*(Scond), 0, U(Scond))(BScond + Y), and here it must hold that
$$ \left[\frac{\partial\lambda(\cdot)}{\partial U}\frac{\partial U(S)}{\partial S}+\frac{\partial\lambda(\cdot)}{\partial M_{\rm F}}\frac{\partial M_{\rm F}(S)}{\partial S}+\alpha\frac{\partial\lambda(\cdot)}{\partial M_{\rm R}}\frac{\partial M_{\rm R}(S)}{\partial S}\right](BS^{*}+Y)+\lambda(M_{\rm F}^{*},0,U(S))B=0.$$
The payoff from \(S^{*}=\tilde{S}, \) where \(\tilde{S}>S^{\rm cond}\) by assumption, is given by \(\lambda(M_{\rm F}(\tilde{S}),M_{\rm R}(\tilde{S}),U(\tilde{S}))(B\tilde{S}+Y). \) With \(M_{R}(\tilde{S})>0\) and \(\tilde{S}-S^{\rm cond}\rightarrow 0, \) the latter choice must produce a higher payoff. To see why, note that the increase in MR* is non-negligible while the increase in MF* and the change in U are negligible given that \(\tilde{S}-S^{\rm cond}\rightarrow0. \) Thus, some \(S^{*}\geq\tilde{S}\) must be optimal.□

The proposition yields a new rationale for stringent renewable energy standards. Although the standard increases the cost of environmental protection, it also creates rents for the renewables industry. Since implementation is impossible when a brown politician gains office, the renewables industry may respond to the standard by mobilizing in support of the green politician. If this political support is valuable enough for the green politician, she is willing to sacrifice economic cost-effectiveness for increased probability of re-election (and thus successful implementation). Importantly, this effect is most probable if the renewables industry is initially weak and disorganized—though not completely dominated by the fossil-fuel industry—so that artificial rents are necessary to achieve political mobilization.

The following logic underpins the proposition. A slight increase in the standard from Scond to \(\tilde{S}\) has a tiny effect on fossil-fuel mobilization and social welfare, so the green politician has little incentive to consider these consequences. But this slight increase is enough to induce the renewables industry to pay the fixed cost of mobilization Q, and thus the increase in MR* is substantial. It is not possible, however, to say whether \(S^{*}=\tilde{S}\) or even slightly higher without imposing additional regularity conditions.

These results are illustrated in Fig. 1. It shows how the green politician’s choice of standard depends on the renewables industry’s fixed cost. For very low levels, the standard remains at the optimum under competitive lobbying. As the fixed cost increases, however, the standard must also increase to keep them lobbying. For sufficiently high levels, the standard again decreases because the electoral cost of mobilizing the renewables industry would be too high.
https://static-content.springer.com/image/art%3A10.1007%2Fs10018-011-0020-4/MediaObjects/10018_2011_20_Fig1_HTML.gif
Fig. 1

The green politician’s choice of renewable energy standards. For sufficiently low fixed cost of mobilization, Q, the green politician selects the optimal standard given competitive lobbying. As the fixed cost increases, the green politician is forced to select a higher standard or the renewables industry stops mobilizing. At some point, the fixed cost is so high that the cost of inducing the renewables industry to mobilize becomes excessive, and the green politician selects a lower standard

While the equilibrium standard S* exceeds \(\tilde{S},\) it need not exceed the social optimum Smax. If the social optimum Smax is approximated by the standard in the absence of mobilization by the renewables industry, so that ScondSmax, then it is clear that S* > Smax. This is the case if the fossil-fuel industry would not lobby very aggressively. But if Smax is much higher than Scond, then S* may fall below Smax. In this case, the mobilization of the renewables industry actually helps shrink the gap between the social optimum and the equilibrium standard.

The European experience offers anecdotal support to the theory. Lipp (2007, 5486) writes that in Denmark—a pioneer in wind energy—as a result of public policy, “an advocacy coalition that initially started with a few wind enthusiasts was able to grow into a veritable influence, continually pushing its collective agenda.” For instance, local ownership schemes for wind energy “helped create support ... because benefits were distributed across a wide group of people.” According to Laird and Stefes (2009), a positive feedback loop also characterized the relationship between the German public policies, such as feed-in tariffs, and the strength of the renewables advocacy coalition. Finally, del Río and Unruh (2007) note that in Spain, ambitious regulatory policies in support of renewable energy have created a powerful and politically active export industry in wind turbines.

6 Conclusion

Environmental economists generally agree that renewable energy standards are not cost-effective (Fischer and Newell 2008; Palmer and Burtraw 2005), yet such policies are empirically prevalent on both sides of the Atlantic (Rabe 2004; Urpelainen 2009; Wiser et al. 2007). What determines the stringency of renewable energy standards? This article has shown that green politicians have incentives to select overly stringent standards, so as to mobilize an initially weak and disorganized renewables industry. By artificially creating rents for the renewables industry, the green politician induces the renewables industry to mobilize and organize politically, so as to ensure that the green politician will remain in office and successfully implement the policy. In the absence of a discriminatory standard, by contrast, the profits for the renewables industry may not suffice to induce political mobilization. As long as the mobilization effect is strong enough to outweigh countermobilization by brown constituencies, the total effect is beneficial for the green politician.

The most important feature of these findings is that they can explain why policymakers sometimes select standards that seem overly stringent, even from an environmentalist’s perspective. Given that the renewables industry is generally less organized than the fossil-fuel industry, a stringent standard may be necessary to help the former overcome the initial hurdle of collective action. While Mitra (1999) has characterized the logic of endogenous lobby formation in detail, this article applies this logic to renewable portfolio standards. The findings provide insight into the efficient design of “second best” policy instruments to mitigate global warming, and they open avenues for future research. For example, how would the results change in an augmented model with alternative policy instruments, such as carbon taxes?

Footnotes
1

“New Energy Powers Up Lobbying.” Huffington Post April 22, 2010.

 
2

“What Green Jobs?” Newsweek July 28, 2009.

 
3

“Renewable and Alternative Energy Portfolio Standards.” Pew Center on Global Climate Change December 14, 2009. See http://www.pewclimate.org/what_s_being_done/in_the_states/rps.cfm. Accessed May 20, 2011.

 
4

“EU Climate Package Explained.” BBC April 9, 2010.

 
5

In the total absence of barriers to entry, this argument does not apply because relentless competition drives rents to zero.

 

Acknowledgments

I thank Michaël Aklin, Christopher Marcoux, the anonymous reviewers, and the editor of Environmental Economics and Policy Studies for comments and advice.

Copyright information

© Springer 2011