The dynamics of the short and long-run effects of public policies supporting renewable energy: A comparative study of installed capacity and electricity generation

Abstract

The design of energy policies, particularly those focused on supporting renewable energy sources, is crucial for facing the major challenges of combining economic growth and sustainable development. This paper focuses on forty-six countries across the world, in three datasets of Global, European, and OECD countries. The timespan under analysis runs from 1996 until 2017, which makes it possible to capture the effects of renewable energy policies in their introductory phase. The policy-related database has been in construction since 1971, the date of the first implemented policy to support renewables. This paper contributes to the literature by assessing the nature of the effects of energy policies on both the installed capacity and the electricity generated by wind power, solar photovoltaic, and a multiple of all non-hydro renewables. A further major innovation of this paper is that it assesses both the short- and long-run effects of adjustments dynamics in policies for implementing renewable energy. The characteristics of the datasets required the use of the Driscoll and Kraay estimator with fixed effects. The results reveal that public policies have dissimilar effects in the short-run and the long-run. It is known that policy-based instruments are essential to implement renewable energy in both the short- and long-run. On the whole, the majority of these instruments are directly linked with public budgets, a position which can lead to an excessive burden on economies. Conversely, market-based instruments have been shown to promote the deployment of renewable energy only in the long-run. The results show that market-based instruments are not capable of promoting the early diffusion of renewable technologies into the market, i.e., in the short-run. In fact, market-based instruments are only effective when renewable technologies are mature and well-integrated in the electricity market, i.e., in the long-run. Therefore, this suggests that an optimal public policy involves a mix of policy-based instruments to enable early market diffusion, and a mix of market-based instruments to maintain investment in renewable energies in the long-run.