Effects of renewable energy use in the energy mix on social welfare

Abstract

This article examines the effects of energy policy on social welfare under the pseudo-social planner's problem. To assess the social welfare effects, we focus on the energy mix as a policy tool and incorporate two factors into the model: cost-efficiency and climate damage. For model calibration, we use U.S. data of levelized cost of energy, carbon dioxide emission intensity, and carbon dioxide concentration in the atmosphere; thus, the analysis is within the scope of the U.S. energy policy. The results show that a 10% increase in the proportion of renewable energy in the energy mix decreases social welfare by 0.753% in the long run. This negative welfare effect of the increase in renewable energy use occurs because the negative effect of reduced cost-efficiency outweighs the positive effect of less climate damage on social welfare. We also find that increased energy policy uncertainty further reduces social welfare. This is because a higher degree of energy policy uncertainty leads to a greater uncertainty in return on capital, which makes rational agents postpone their investment. • The article examines the effects of renewable energy use on social welfare. • The proportion of renewable energy in the energy mix serves as a policy tool. • The trade-off between cost-efficiency and climate damage is considered in the model. • Increasing the proportion of renewable energy in the energy mix reduces social welfare. • Increased energy policy uncertainty also reduces social welfare through investment.