Interactions Between Climate Policies in the Power Sector - Green Energy and Efficiency: An Economic Perspective - page 278

The superiority of carbon pricing policies alone over any alternative policy mix
is based on the additional cost that support mechanisms for renewable energy
sources for electricity (RES-E) imply for the abatement of emissions, the lower
effectiveness of RES-E to reduce carbon emissions and the negative impact RES-E
deployment has on emission prices, which might delay investments in other more
ef cient options to reduce carbon emissions. 18 Therefore RES-E support mecha-

nisms are at best, redundant and likely to generate excess cost.

5 The Case for Additional Instruments

What could justify the existence of additional instruments on top of carbon pricing
policies? The economic literature nds basically two main groups of reasons for

setting additional instruments to reduce carbon emissions 19 : First, if there are
imperfections in the carbon market which lead to too low a carbon price; and
second, to promote the positive externalities of non-appropriable investments in
R&D that will contribute to reducing the carbon abatement cost. 20
There are many other reasons why governments might decide to support
renewables such as promoting renewables as industrial policy, job creation or energy
independence. However, such reasons do not seem to respond to the existence of
market failures or, at least, not to market failures exclusive to the renewables
industry. Therefore, such justi cations will not be addressed here.

5.1 Carbon Market Imperfections

The rst argument would be related to the existence of market imperfections or

design aws which make that the carbon price alone is not effective to attain a

speci c target. Such lack of effectiveness could be caused for example by an

allocation of excessive number of carbon credits that makes the CO 2 target non-
binding (and thus, the carbon price close to zero) or by the possible inconsistencies
between short-term carbon markets and long term climate objectives which might
result in an inef cient carbon price path.

18

See e.g. Del R í o[ 20 ], B ö hringer and Rosendahl [ 5 ], Abrell and Weigt [ 1 ].

19 See Borenstein [ 6 ].
20 Other common market failures discussed by the literature are asymmetric and imperfect
information and principal-agent problems (which might explain household decisions to underin-
vest in renewable technologies but are not very much applicable to rms as explained by Gill-
ingham and Sweeney [ 14 ]. Other justi cations such as energy security, job creation, and driving
down fossil fuel prices, are generally not supported by sound economic analysis.