Interactions Between Climate Policies in the Power Sector - Green Energy and Efficiency: An Economic Perspective - page 281

produce more renewables during the rst period without additional support. The

ability to capture the bene ts from learning by doing is not necessarily associated to

monopoly power, but may also be associated to the existence of patents.
However, in the case where

rms are not able to appropriate the results of their
investment, public support is justi ed. If learning by doing effects constitute a

public good (i.e. cost reductions arise from general industry experience and not only
from individual industry experience) then, as in the case of other public goods,

rms will produce suboptimal amounts during the rst period. That can justify a

renewables target during the rst period and, consequently, a subsidy to promote

the production of RES-E during the rst period.

In summary, only in the presence of learning-by-doing based on industry
experience and of suf cient competition in the production of electricity, a subsidy to

renewables would be justi

ed. Ideally, such a subsidy should be proportional to the
learning-by-doing spillovers.
There is however little evidence of the existence of learning by doing in the
renewable industry and, also, such effects are not easily quanti able. 21 It is there-

fore complex to justify a RES-E support mechanism based on learning-by-doing
effects (and also to assess whether the amount of such subsidy responds to the
learning-by-doing spillovers).

5.2.2 R&D Investment in Renewables

Investment in R&D reduces the cost of producing renewables. In our model R&D
investment can be modelled as an investment cost I which reduces the production

costs by 1 0. The renewables cost

function in the presence of R&D would be GðIÞc 2 ðq 2 ÞI . The pro

− G ( I ), where G (0) = 1, G ( I ) ≤ 1 and G ′ ( I ) ≤

t function of

the monopolist would therefore be:

Max PðQÞ q 1 þ q 2

ð Þ c 1 ðq 1 ÞGðIÞc 2 ðq 2 Þþrq 2 p e e 1 I

R&D investment would increase the competitiveness of the renewable technol-
ogy and would therefore reduce the subsidy necessary to meet a speci c renewable

target.
The existence of positive externalities from R&D investment could justify
subsidies to R&D but not subsidies to the deployment of renewables. Again,
subsidies to R&D make sense only if there are positive externalities from R&D and
these cannot be captured by individual

rms. If bene ts from R&D are fully cap-

tured by the R&D investors, then there is no justi cation for subsidies.

21 As Borenstein [ 6 ] states,

most studies of learning-by-doing are not able to separate learning-
by-doing from other changes ” and “ the evidence of strong learning-by-doing is thin and credible
results on spillovers are even more rare ” .

“