Combining Policies for Renewable Energy: Is the Whole Less than the Sum of Its Parts?

Since the energy crisis in the 1970s and later the growing concern for climate change in the 1990s, policymakers at all levels of government and around the world have been enthusiasticallysupporting a wide range of incentive mechanisms for electricity from renewable energy sources (RES-E). Motivations range from energy security to environmental preservation to green jobs and innovation, and measures comprise an array of subsidies to mandates to emissions trading. But do these policies work together or at cross-purposes? To evaluate RES-E policies, one must understand how specific policymechanisms interact with each other and under what conditions multiple policy levers are necessary. In this article, we review the recent environmental economics literature on the effectiveness of RES-E policies and the interactions between them, with a focus on the increasing use of tradable quotas for both emissions reduction and RES-E expansion.

Promoting renewable energy is a popular platform for leaders seeking to increase energy security, reduce greenhouse gas emissions, create green jobs, or all of the above. With a growing patchwork of plans to achieve these goals, however, questions are arising about how these policies interact.

Incentive mechanisms forelectricity from renewable energy sources (RES-E) range from emissions pricing to feed-in tariffs to renewable portfolio standards. In “Combining Policies for Renewable Energy: Is the Whole Less than the Sum of Its Parts?”, RFF Senior Fellow Carolyn Fischer and Research Assistant Louis Preonas review the recent literature.

They find that once emissions from electricity generation are sufficiently priced or capped, additional renewable energy policies lead to little further emissions reductions or environmental benefit; in fact, they lower costs for the dirtier producers. Consequently, further RES-E policies can only be justified if they address other market failures, such as spillovers from technological innovation and learning as well as market and regulatory barriers.

Fischer and Preonas also look at other RES-E policy combinations. For example, because portfolio standards link renewable to nonrenewable generation, additional subsidies to promote renewable energy tend to allow dirtier sources to expand their emissions.

They note that the cost associated with a single policy is more apparent, and possibly less palatable, to consumers than with multiple instruments. This makes simultaneous policies more likely and increases the importance of understanding policy interactions.