Lecuyer and Quirion (2019) examine the interactions between a CO2 emissions trading system (ETS) and renewable energy subsidies under uncertainty over electricity demand and energy costs.
They find that when uncertainty is small renewable energy subsidies are not welfare-improving because an increase in electricity generation from renewable energies cannot have an impact on CO2 emissions already covered by an ETS cap. However, they show that when uncertainty is large enough, these subsidies increase expected welfare because they provide CO2 abatement even in the case of over-allocation–when the cap is higher than the emissions which would have occurred without the ETS.
The authors were also able to assess preferability of different renewable energy subsidies, depending on the causes of uncertainty. They show that under uncertainty over electricity demand, renewable energy costs or gas prices, a feed-in tariﬀ brings higher expected welfare than a feed-in premium because it provides a higher subsidy when it is actually needed (when the electricity price is low). Under uncertainty over coal prices, however, the opposite result holds true.Visit the Climate Strategies and Climate Policies website to read the full blog on the article or access the published paper here.