Optimal federal co-regulation of renewable energy deployment

Abstract

In federally organized countries the allocation of renewable energy (RE) deployment is regulated by national and subnational governments. We analyze the efficiency of this federal co-regulation when different types of policy instruments – price and quantity – are applied at different government levels. Using an analytical model with two government levels, we show that efficient federal co-regulation crucially depends on the burden sharing of national subsidy costs among subnational jurisdictions. We find that national price-based regulation, i.e. feed-in tariff, is efficient if burden shares of subnational jurisdictions are distributed in proportion to their population. This holds regardless of the policy instrument applied at the subnational level as long as RE deployment causes regional costs instead of regional benefits. Under national quantity-based regulation, i.e. tenders, efficient burden sharing depends on the policy instrument applied at the subnational level. Subnational price-based regulation, e.g. state-level levies, combined with national quantity-based regulation requires burden shares to be oriented towards first-best RE deployment shares. By contrast, subnational quantity-based regulation, i.e. spatial planning, combined with national quantity-based regulation, under certain conditions, requires population-oriented burden sharing, namely, if RE deployment only causes negative regional effects. If so, we also show that national quantity-based regulation ends up to be de-facto price-based.