Environmental and Technology Policy Options in the Electricity Sector: Are We Deploying Too Many?

Abstract

Myriad policy measures aim to reduce greenhouse gas emissions from the electricity sector, promote generation from renewable sources, and encourage energy efficiency (EE). Prior literature has argued that overlapping policies reduce the efficiency of emissions markets, absent other market failures. We extend the model of Fischer and Newell to incorporate knowledge spillovers for both advanced and conventional renewable energy technologies, as well as imperfections in demand for EE investments. EE undervaluation can justify interventions and raises the importance of fully pricing the social costs of electricity, making policies (like renewable subsidies) that lower electricity prices less desirable. Innovation market failures justify some technology policies, particularly correcting R&D incentives, but aggressive deployment policies seem unlikely to enhance welfare when placed alongside sufficient emissions pricing. Even with multiple market failures, emissions pricing remains the most cost-effective option for reducing emissions. However, technology-oriented policies can involve less redistribution of surplus.