Abstract
Around the world, green certificate systems are widely employed as support mechanisms for the promotion of renewable energy production. Due to large initial capital costs for renewable energy projects, investment cost reduction policies are often employed by policy makers as complementary support measures. In this note, we study some implications of the use of investment cost reduction policies in an energy market operated under a green certificate system. We demonstrate that, paradoxically, use of (or intensification of) investment cost reduction policies results in increased emissions from fossil fuel (“black”) producers. Welfare effects depend on the distribution of costs and benefits to the relevant interest groups. However, if the policy objective requires maintaining a constant level of emissions, investment cost mitigation must be accompanied by a simultaneous upward adjustment in the renewables target.
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Notes
Proof of compliance is established when the consumers turn the certificates over to the relevant authorities at a specified time. Sanctions are typically imposed for noncompliance. See Neilsen and Jeppesen (2003) for additional details.
In the United States, green certificates are often referred to as Renewable Energy Credits or Renewable Energy Certificates.
Green certificate systems employed for the promotion of renewable energy should not be confused with “Green Certification” or “Ecolabeling,” where producers market goods or services to “green” consumers by obtaining third-party verification that their product are “environmentally friendly.”
Capital grants are paid up front and have been widely employed in the OECD countries, with Germany (which also employs feed-in tariffs) representing one notable success with respect to entry of wind and solar power producers within the last 20 years (Kalamova et al. 2011).
For a regulatory paradox related to the design of incentive schemes for optimal pricing, see Vogelsang (1988).
We assume throughout that renewable energy investment cost reduction policies cause direct reductions in \(K_{x}\).
Alternatively, the obligation to hold certificates may be placed upon producers.
In the US, the Clean Energy Standard Act (CESA 2012) provides for certification of natural gas-based electricity generation. Our analysis implicitly ignores this possibility since we assume that any certified producer generates zero emissions.
As is customary in the literature, we ignore the integer requirement on the number of producers.
The author is grateful to an anonymous referee for this observation.
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I would like to thank two anonymous referees for many extremely helpful comments and suggestions on earlier versions of this manuscript.
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Currier, K.M. Some Implications of Investment Cost Reduction Policies in Energy Markets Employing Green Certificate Systems. Environ Resource Econ 60, 317–323 (2015). https://doi.org/10.1007/s10640-014-9774-z
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DOI: https://doi.org/10.1007/s10640-014-9774-z