[go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/a/eee/pubeco/v203y2021ics0047272721001511.html
   My bibliography  Save this article

More birds than stones – A framework for second-best energy and climate policy adjustments

Author

Listed:
  • Fischer, Carolyn
  • Hübler, Michael
  • Schenker, Oliver
Abstract
A well-known principle in public economics states that at least as many policy instruments as market failures are required to achieve an efficient outcome. In practice, however, regulatory power is often constrained, making implementing the first-best policy portfolio difficult or impossible. We analyze analytically and numerically how available policy instruments should be adjusted vis-à-vis the first-best to account for under-internalized secondary market failures. Consider, for example, the power sector: alongside the external costs of emissions, evidence suggests that consumers undervalue energy efficiency investments, and knowledge spillovers hamper research and development (R&D) and learning-by-doing in low-carbon technologies. By exploring the potential and limits of policy instrument substitution, we provide suggestions for adjusting policies in second-best situations. We calibrate the theoretical model to the European electricity sector and find that, compared with the first-best policy portfolio, relying on carbon dioxide (CO2) pricing alone increases the policy cost of the EU CO2 emissions target by about 30%. Uninternalized R&D spillovers contribute the most to this increase, and are the most difficult to address indirectly, even with subsidies supporting learning-by-doing. By contrast, almost 40% of the additional cost created by the absence of optimal energy efficiency subsidies can be recuperated by a second-best electricity tax.

Suggested Citation

  • Fischer, Carolyn & Hübler, Michael & Schenker, Oliver, 2021. "More birds than stones – A framework for second-best energy and climate policy adjustments," Journal of Public Economics, Elsevier, vol. 203(C).
    • Handle: RePEc:eee:pubeco:v:203:y:2021:i:c:s0047272721001511
    DOI: 10.1016/j.jpubeco.2021.104515
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0047272721001511
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jpubeco.2021.104515?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Kenneth Gillingham & Karen Palmer, 2014. "Bridging the Energy Efficiency Gap: Policy Insights from Economic Theory and Empirical Evidence," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 8(1), pages 18-38, January.
    2. Dechezlepretre, Antoine & Martin, Ralf & Mohnen, Myra, 2014. "Knowledge spillovers from clean and dirty technologies," LSE Research Online Documents on Economics 60501, London School of Economics and Political Science, LSE Library.
    3. Kalkuhl, Matthias & Edenhofer, Ottmar & Lessmann, Kai, 2013. "Renewable energy subsidies: Second-best policy or fatal aberration for mitigation?," Resource and Energy Economics, Elsevier, vol. 35(3), pages 217-234.
    4. Daron Acemoglu & Philippe Aghion & Leonardo Bursztyn & David Hemous, 2012. "The Environment and Directed Technical Change," American Economic Review, American Economic Association, vol. 102(1), pages 131-166, February.
    5. Hunt Allcott & Dmitry Taubinsky, 2015. "Evaluating Behaviorally Motivated Policy: Experimental Evidence from the Lightbulb Market," American Economic Review, American Economic Association, vol. 105(8), pages 2501-2538, August.
    6. Till Requate, 2015. "Green tradable certificates versus feed-in tariffs in the promotion of renewable energy shares," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 17(2), pages 211-239, April.
    7. Fischer, Carolyn, 2008. "Emissions pricing, spillovers, and public investment in environmentally friendly technologies," Energy Economics, Elsevier, vol. 30(2), pages 487-502, March.
    8. Lecuyer, Oskar & Quirion, Philippe, 2013. "Can uncertainty justify overlapping policy instruments to mitigate emissions?," Ecological Economics, Elsevier, vol. 93(C), pages 177-191.
    9. Popp, David & Newell, Richard G. & Jaffe, Adam B., 2010. "Energy, the Environment, and Technological Change," Handbook of the Economics of Innovation, in: Bronwyn H. Hall & Nathan Rosenberg (ed.), Handbook of the Economics of Innovation, edition 1, volume 2, chapter 0, pages 873-937, Elsevier.
    10. Kalkuhl, Matthias & Edenhofer, Ottmar & Lessmann, Kai, 2012. "Learning or lock-in: Optimal technology policies to support mitigation," Resource and Energy Economics, Elsevier, vol. 34(1), pages 1-23.
    11. Lawrence H. Goulder & Ian W.H. Parry & Roberton C. Williams III & Dallas Burtraw, 2002. "The Cost-Effectiveness of Alternative Instruments for Environmental Protection in a Second-Best Setting," Chapters, in: Lawrence H. Goulder (ed.), Environmental Policy Making in Economies with Prior Tax Distortions, chapter 27, pages 523-554, Edward Elgar Publishing.
    12. Fischer, Carolyn & Preonas, Louis, 2010. "Combining Policies for Renewable Energy: Is the Whole Less Than the Sum of Its Parts?," International Review of Environmental and Resource Economics, now publishers, vol. 4(1), pages 51-92, June.
    13. Boeters, Stefan & Koornneef, Joris, 2011. "Supply of renewable energy sources and the cost of EU climate policy," Energy Economics, Elsevier, vol. 33(5), pages 1024-1034, September.
    14. Williams, Roberton C., 2012. "Growing state–federal conflicts in environmental policy: The role of market-based regulation," Journal of Public Economics, Elsevier, vol. 96(11), pages 1092-1099.
    15. Hunt Allcott & Michael Greenstone, 2012. "Is There an Energy Efficiency Gap?," Journal of Economic Perspectives, American Economic Association, vol. 26(1), pages 3-28, Winter.
    16. Antoine Dechezleprêtre & Cal B. Muckley & Parvati Neelakantan, 2021. "Is firm-level clean or dirty innovation valued more?," The European Journal of Finance, Taylor & Francis Journals, vol. 27(1-2), pages 31-61, January.
    17. Soren T. Anderson & Ian W. H. Parry & James M. Sallee & Carolyn Fischer, 2011. "Automobile Fuel Economy Standards: Impacts, Efficiency, and Alternatives," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 5(1), pages 89-108, Winter.
    18. Miketa, Asami & Schrattenholzer, Leo, 2004. "Experiments with a methodology to model the role of R&D expenditures in energy technology learning processes; first results," Energy Policy, Elsevier, vol. 32(15), pages 1679-1692, October.
    19. Katrina Jessoe & David Rapson, 2014. "Knowledge Is (Less) Power: Experimental Evidence from Residential Energy Use," American Economic Review, American Economic Association, vol. 104(4), pages 1417-1438, April.
    20. Koichiro Ito, 2014. "Do Consumers Respond to Marginal or Average Price? Evidence from Nonlinear Electricity Pricing," American Economic Review, American Economic Association, vol. 104(2), pages 537-563, February.
    21. Todd D. Gerarden & Richard G. Newell & Robert N. Stavins, 2017. "Assessing the Energy-Efficiency Gap," Journal of Economic Literature, American Economic Association, vol. 55(4), pages 1486-1525, December.
    22. Qiu, Yueming & Anadon, Laura D., 2012. "The price of wind power in China during its expansion: Technology adoption, learning-by-doing, economies of scale, and manufacturing localization," Energy Economics, Elsevier, vol. 34(3), pages 772-785.
    23. Lindman, Åsa & Söderholm, Patrik, 2012. "Wind power learning rates: A conceptual review and meta-analysis," Energy Economics, Elsevier, vol. 34(3), pages 754-761.
    24. Hall, Bronwyn H. & Mairesse, Jacques & Mohnen, Pierre, 2010. "Measuring the Returns to R&D," Handbook of the Economics of Innovation, in: Bronwyn H. Hall & Nathan Rosenberg (ed.), Handbook of the Economics of Innovation, edition 1, volume 2, chapter 0, pages 1033-1082, Elsevier.
    25. Lori Bennear & Robert Stavins, 2007. "Second-best theory and the use of multiple policy instruments," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 37(1), pages 111-129, May.
    26. Hirth, Lion & Ueckerdt, Falko, 2013. "Redistribution effects of energy and climate policy: The electricity market," Energy Policy, Elsevier, vol. 62(C), pages 934-947.
    27. Charles I. Jones & John C. Williams, 1998. "Measuring the Social Return to R&D," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 113(4), pages 1119-1135.
    28. Ian W.H. Parry & Roberton C. Williams III & Lawrence H. Goulder, 2002. "When Can Carbon Abatement Policies Increase Welfare? The Fundamental Role of Distorted Factor Markets," Chapters, in: Lawrence H. Goulder (ed.), Environmental Policy Making in Economies with Prior Tax Distortions, chapter 25, pages 471-503, Edward Elgar Publishing.
    29. Charles T. Driscoll & Jonathan J. Buonocore & Jonathan I. Levy & Kathleen F. Lambert & Dallas Burtraw & Stephen B. Reid & Habibollah Fakhraei & Joel Schwartz, 2015. "US power plant carbon standards and clean air and health co-benefits," Nature Climate Change, Nature, vol. 5(6), pages 535-540, June.
    30. Kenneth Gillingham & Richard G. Newell & Karen Palmer, 2009. "Energy Efficiency Economics and Policy," Annual Review of Resource Economics, Annual Reviews, vol. 1(1), pages 597-620, September.
    31. Fischer, Carolyn & Newell, Richard G., 2008. "Environmental and technology policies for climate mitigation," Journal of Environmental Economics and Management, Elsevier, vol. 55(2), pages 142-162, March.
    32. Bernard, Alain L. & Fischer, Carolyn & Fox, Alan K., 2007. "Is there a rationale for output-based rebating of environmental levies?," Resource and Energy Economics, Elsevier, vol. 29(2), pages 83-101, May.
    33. R. G. Lipsey & Kelvin Lancaster, 1956. "The General Theory of Second Best," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 24(1), pages 11-32.
    34. Bronwyn H. Hall & Nathan Rosenberg (ed.), 2010. "Handbook of the Economics of Innovation," Handbook of the Economics of Innovation, Elsevier, edition 1, volume 1, number 1.
    35. Christoph Böhringer & Knut Rosendahl, 2010. "Green promotes the dirtiest: on the interaction between black and green quotas in energy markets," Journal of Regulatory Economics, Springer, vol. 37(3), pages 316-325, June.
    36. Carolyn Fischer & Louis Preonas & Richard G. Newell, 2017. "Environmental and Technology Policy Options in the Electricity Sector: Are We Deploying Too Many?," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 4(4), pages 959-984.
    37. Dani Rodrik, 2008. "Second-Best Institutions," American Economic Review, American Economic Association, vol. 98(2), pages 100-104, May.
    38. Christoph Böhringer & Henrike Koschel & Ulf Moslener, 2008. "Efficiency losses from overlapping regulation of EU carbon emissions," Journal of Regulatory Economics, Springer, vol. 33(3), pages 299-317, June.
    39. Georg Zachmann & Amma Serwaah & Michele Peruzzi, 2014. "When and how to support renewables? Letting the data speak," Working Papers 811, Bruegel.
    40. Georg Zachmann & Amma Serwaah & Michele Perruzi, "undated". "When & how to support renewables? Letting the data speak," SIMPATIC Working Papers 951, Bruegel.
    41. Flues, Florens & Löschel, Andreas & Lutz, Benjamin Johannes & Schenker, Oliver, 2014. "Designing an EU energy and climate policy portfolio for 2030: Implications of overlapping regulation under different levels of electricity demand," Energy Policy, Elsevier, vol. 75(C), pages 91-99.
    42. Cremer, Helmuth & Gahvari, Firouz, 2001. "Second-best taxation of emissions and polluting goods," Journal of Public Economics, Elsevier, vol. 80(2), pages 169-197, May.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Moritz A. Drupp & Frikk Nesje & Robert C. Schmidt & Robert Christian Schmidt, 2022. "Pricing Carbon," CESifo Working Paper Series 9608, CESifo.
    2. Hübler, Michael & Wiese, Malin & Braun, Marius & Damster, Johannes, 2024. "The distributional effects of CO2 pricing at home and at the border on German income groups," Resource and Energy Economics, Elsevier, vol. 77(C).
    3. Christian Haas & Karol Kempa, 2023. "Low-Carbon Investment and Credit Rationing," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 86(1), pages 109-145, October.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Michael Hübler & Oliver Schenker & Carolyn Fischer, 2015. "Second-Best Analysis of European Energy Policy: Is One Bird in the Hand Worth Two in the Bush?," Working Papers 2015.106, Fondazione Eni Enrico Mattei.
    2. Lehmann, Paul & Gawel, Erik, 2013. "Why should support schemes for renewable electricity complement the EU emissions trading scheme?," Energy Policy, Elsevier, vol. 52(C), pages 597-607.
    3. Paul Lehmann & Jos Sijm & Erik Gawel & Sebastian Strunz & Unnada Chewpreecha & Jean-Francois Mercure & Hector Pollitt, 2019. "Addressing multiple externalities from electricity generation: a case for EU renewable energy policy beyond 2020?," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 21(2), pages 255-283, April.
    4. Paul Lehmann & Patrik Söderholm, 2018. "Can Technology-Specific Deployment Policies Be Cost-Effective? The Case of Renewable Energy Support Schemes," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 71(2), pages 475-505, October.
    5. Sijm, Jos & Lehmann, Paul & Chewpreecha, Unnada & Gawel, Erik & Mercure, Jean-Francois & Pollitt, Hector & Strunz, Sebastian, 2014. "EU climate and energy policy beyond 2020: Are additional targets and instruments for renewables economically reasonable?," UFZ Discussion Papers 3/2014, Helmholtz Centre for Environmental Research (UFZ), Division of Social Sciences (ÖKUS).
    6. Lehmann, Paul, 2013. "Supplementing an emissions tax by a feed-in tariff for renewable electricity to address learning spillovers," Energy Policy, Elsevier, vol. 61(C), pages 635-641.
    7. Tilmann Rave & Ursula Triebswetter & Johann Wackerbauer, 2013. "Koordination von Innovations-, Energie- und Umweltpolitik," ifo Forschungsberichte, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 61.
    8. del Río, Pablo, 2017. "Why does the combination of the European Union Emissions Trading Scheme and a renewable energy target makes economic sense?," Renewable and Sustainable Energy Reviews, Elsevier, vol. 74(C), pages 824-834.
    9. Todd D. Gerarden & Richard G. Newell & Robert N. Stavins, 2017. "Assessing the Energy-Efficiency Gap," Journal of Economic Literature, American Economic Association, vol. 55(4), pages 1486-1525, December.
    10. Cameron Hepburn & Jacquelyn Pless & David Popp, 2018. "Policy Brief—Encouraging Innovation that Protects Environmental Systems: Five Policy Proposals," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 12(1), pages 154-169.
    11. Laura Abrardi, 2019. "Behavioral barriers and the energy efficiency gap: a survey of the literature," Economia e Politica Industriale: Journal of Industrial and Business Economics, Springer;Associazione Amici di Economia e Politica Industriale, vol. 46(1), pages 25-43, March.
    12. Jan Siegmeier & Linus Mattauch & Max Franks & David Klenert & Anselm Schultes & Ottmar Edenhofer, 2015. "A Public Finance Perspective on Climate Policy: Six Interactions That May Enhance Welfare," Working Papers 2015.31, Fondazione Eni Enrico Mattei.
    13. Joseph E. Aldy & Alan J. Krupnick & Richard G. Newell & Ian W. H. Parry & William A. Pizer, 2010. "Designing Climate Mitigation Policy," Journal of Economic Literature, American Economic Association, vol. 48(4), pages 903-934, December.
    14. Edenhofer, Ottmar & Lessmann, Kai & Tahri, Ibrahim, 2024. "Asset pricing and the carbon beta of externalities," Journal of Environmental Economics and Management, Elsevier, vol. 125(C).
    15. Giraudet, Louis-Gaëtan, 2020. "Energy efficiency as a credence good: A review of informational barriers to energy savings in the building sector," Energy Economics, Elsevier, vol. 87(C).
    16. Jun Rentschler & Raimund Bleischwitz & Florian Flachenecker, 2018. "On imperfect competition and market distortions: the causes of corporate under-investment in energy and material efficiency," International Economics and Economic Policy, Springer, vol. 15(1), pages 159-183, January.
    17. Ovaere, Marten & Proost, Stef, 2022. "Cost-effective reduction of fossil energy use in the European transport sector: An assessment of the Fit for 55 Package," Energy Policy, Elsevier, vol. 168(C).
    18. Louis-Gaëtan Giraudet, 2018. "Energy efficiency as a credence good: A review of informational barriers to building energy savings," Working Papers 2018.07, FAERE - French Association of Environmental and Resource Economists.
    19. Felix Groba & Barbara Breitschopf, 2013. "Impact of Renewable Energy Policy and Use on Innovation: A Literature Review," Discussion Papers of DIW Berlin 1318, DIW Berlin, German Institute for Economic Research.
    20. Gregory Casey, 2024. "Energy Efficiency and Directed Technical Change: Implications for Climate Change Mitigation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 91(1), pages 192-228.

    More about this item

    Keywords

    Second-best policy; Climate and energy policy; Multiple market failures;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q55 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Technological Innovation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:pubeco:v:203:y:2021:i:c:s0047272721001511. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/505578 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.