Emissions pricing instruments with intermittent renewables: second-best policy

Nandeeta Neerunjun ()
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Nandeeta Neerunjun: AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique, M2P2 - Laboratoire de Mécanique, Modélisation et Procédés Propres - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique

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Abstract: I analyze emissions pricing to support the integration of a renewable resource into an electricity mix composed of an emissions-intensive technology. I consider the intermittent nature of the resource such as wind energy and incremental externalities that become severe for high emissions levels. I show that an emissions tax is inefficient when consumers are on flat-rate electricity tariffs and cannot adapt their consumption to varying production. The tax is inefficient even with flexibility in the markets when consumers are on varying tariffs. The renewable resource induces variability in fossil-fueled electricity production and associated marginal damage that does not match a predetermined tax. I study an Emissions Trading Scheme that provides flexibility at the policy level. Emissions permits are traded at varying prices. Since the emissions cap must still be predetermined, I show that it leads to inefficient permits prices that do not match the marginal damages. I also find that the two emissions pricing instruments are not implemented equivalently since the tax differs from the prices of permits.

Keywords: electricity; renewables; intermittency; emissions tax; Emissions Trading Scheme (search for similar items in EconPapers)
Date: 2022-07-12
New Economics Papers: this item is included in nep-ene and nep-env
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