Read

First-Best Policy and Decentralized Mechanisms

Publication Date Jan 1, 2020

Abstract

Externalities stemming from greenhouse gas (GHG) emissions may drive a wedge between social and private incentives concerning investment and operations in the power sector. While a central planner who internalizes GHG emissions via a Pigouvian tax to curb consumption may yield a first-best policy, decentralized mechanisms are typically deployed in OECD countries’ power sectors in order to align the incentives of private power companies with those of society. Using a bi-level modeling approach, we develop a framework in which a welfare-maximizing policymaker at the upper level sets the renewable portfolio standard (RPS) target for industry, which takes it as a regulatory parameter at the lower level when making its profit-maximizing capacity-expansion and generation-operation decisions. We demonstrate that even in the case of perfect competition, RPS cannot fully align social and private incentives in mitigation of GHG emissions since consumption is not curbed to the same extent as under the first-best policy. Consequently, “too much” renewable energy (RE) investment takes place. This distortion is less pronounced when power companies behave a la Cournot because the exercise of market power already diminishes consumption, thereby reducing the need for RE investment. We illustrate these principles using case studies based on a stylized network and provide techniques for resolving the bi-level problems. Extensions to these cases are explored in the end-of-chapter exercises with implementation of the problem instances in GAMS.

Concepts
Powered ByUnsilo

Renewable Energy Investment
Greenhouse Gas Emissions
Renewable Portfolio Standard
First-best Policy
Power Sector
Bi-level Modeling Approach
Mitigation Of Greenhouse Gas Emissions
Exercise Of Market Power
OECD Countries
Greenhouse Gas

Introducing Weekly Round-ups!Beta

Powered by R DiscoveryR Discovery

Round-ups are the summaries of handpicked papers around trending topics published every week. These would enable you to scan through a collection of papers and decide if the paper is relevant to you before actually investing time into reading it.

Climate change Research Articles published between Aug 08, 2022 to Aug 14, 2022

R DiscoveryAug 15, 2022
R DiscoveryArticles Included:  5

Introduction: There is no consensus on the policies that should be seen as implicitly pricing carbon (see World Bank (2019a) for a discussion). The OE...

Read More

Gender Equality Research Articles published between Aug 08, 2022 to Aug 14, 2022

R DiscoveryAug 15, 2022
R DiscoveryArticles Included:  4

I would like to thank Anna Khakee, Federica Zardo and Ragnar Weilandt for their very useful comments as well as the participants of the workshop of 21...

Read More

Coronavirus Pandemic

You can also read COVID related content on R COVID-19

R ProductsCOVID-19

ONE PROBLEM . ONE PURPOSE . ONE PLACE

Creating the world’s largest AI-driven & human-curated collection of research, news, expert recommendations and educational resources on COVID-19

COVID-19 Dashboard

Disclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on “as is” basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The Copyright Law.