Environmental Engineering Reference
In-Depth Information
4
Economic and legal principles
Figure 1.1
below depicts this concept graphically using simple marginal cost
and marginal benefit curves. Suppose that, for a given wind or solar energy
development project, a developer's marginal cost of installing additional units
of renewable energy generating capacity appears as curve
MC
. The tendency
for developers to focus solely on their own marginal benefits from additional
renewable energy installations (represented by the marginal cost curve
MB
p
)
rather than on the broader social benefits of such additional capacity (
MB
s
)
can lead them to install a quantity of installed capacity (
Q
1
) that is less than
the socially optimal amount (
Q*
). In summary, unless governments intervene
to correct them, positive externality problems can result in an inefficiently
low quantity of renewable energy development.
Governments across the world are well aware of this positive externality
problem associated with renewable energy and have formulated a wide
array of creative programs and policies aimed at countering it. Many of
these programs seek to reduce the market cost of renewable energy devel-
opment through direct subsidies, investment tax credits, special financing
programs, streamlined permitting processes, and related means so as to
effectively shift developers' marginal cost curves downward.
This intended effect of incentive programs on the pace of renewable
energy development is illustrated in
Figure 1.2
.
Government subsidies,
investment tax credits and similar cost-reduction programs seek to shift
the marginal cost curve for renewable energy development downward from
MC
to
MC
i
. All else equal, such cost reductions incentivize landowners and
developers to increase the quantity of installed renewable energy generating
capacity from
Q
1
to
Q*
.
10017
10017
10017
10017
Q,
Q*
Quantity of installed renewable energy capacity
Figure 1.1
Positive
externality problems in renewable energy development
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