Interactions Between Climate Policies in the Power Sector - Green Energy and Efficiency: An Economic Perspective - page 282

5.2.3 Investment in Carbon Efciency

Improvements in the carbon ef ciency of fossil-fuelled technologies would affect

the emissions function e 1 = f ( q 1 ). Improvements in the carbon ef ciency reduce the

emissions per unit of output of fossil-fuelled energy. This would translate into lower
carbon prices and larger production of the fossil-fuelled energy.
Paradoxically, the improvement in carbon ef ciency would increase the com-

petitiveness of carbon emitting technologies and thus higher subsidies would be
required to meet a speci

ciency
of fossil-fuelled technologies reduces emissions and thus reduces the need for
supporting renewables.

c renewables target R . However, better carbon ef

6 Conclusions and Policy Recommendations

We know that the use of fossil fuels generates GHG emissions and, thus, imposes
external costs on present and future generations that are not re

ected in its market
price. This encourages the consumption of non-renewable energy above its socially
optimal level. Pricing correctly the externality costs is therefore the most ef cient

policy to restore optimality. Consequently, GHG emission caps (and associated
carbon prices) or carbon taxes are the best policy to reduce carbon emissions.
However, additional policies may be justi ed when the carbon policies show

imperfections and design aws, or in the presence of other market failures.

This chapter focuses on the interaction between carbon markets and RES-E
support mechanisms. A number of conclusions can be reached in such context:
First, if emissions are subject to a binding cap and the emissions market is well
designed, then expanding the renewables production does not bring any additional
bene ts in emissions reductions. Yet, theoretical and empirical studies show that

such policies tend to increase the cost of emissions reduction in comparison with a
policy based on carbon prices.
Second, additional policies aiming to support the production of RES-E may be
justi

aws in carbon policies and in
the presence of non-appropriable spillovers from technological innovation. Nev-
ertheless, empirical evidence shows that the cost of reducing emissions is larger
when the two policies are simultaneously activated. Therefore, the use of other
policy instruments should be limited to the cases where their expected bene

ed in the presence of imperfections or design

ts are

veri able.

Third, RES-E support policies tend to reduce carbon prices and decrease
wholesale electricity prices. However, retail prices will be higher if subsidies are
recouped via uplifts on electricity retail prices. This, in turn, reduces the relative
costs of fossil fuels versus renewable energy, which carries two major risks that
should be addressed. One is the reduction of the nal demand for electricity and

the increase in the share of fossil fuels nal consumption. The other risk is low-

emissions fossil fuel, for instance gas, being replaced by high-emissions fossil fuels,