Optimal Renewable-Energy Subsidies
Social Science Research Network
We derive optimal subsidization of renewable energies in electricity markets. The analysis takes into account that capacity investment must be chosen under uncertainty about demand conditions and capacity availability, and that capacity as well as electricity generation may be sources of externalities. The main result is that generation subsidies should correspond to externalities of electricity generation (e.g., greenhouse gas reductions), and investment subsidies should correspond to
... respond to externalities of capacity (e.g., learning spillovers). If only capacity externalities exist, then electricity generation should not be subsidized at all. Our results suggest that some of the most popular promotion instruments cause welfare losses. JEL Codes: Q41; Q48; H23 * Thanks to Lucas Davis, Manuel Frondel, Jörg Lingens, Mark Schopf, Michael Simora, Stephan Sommer, Wolfgang Ströbele and Colin Vance for very valuable comments. We give particular thanks to Kai Flinkerbusch who co-authored an earlier working paper whose ideas we develop and extend in the current article.