Scandinavian Working Papers in Economics

Working Papers in Economics,
University of Bergen, Department of Economics

No 3/18: Addressing the climate problem: Choice between allowances, feed-in tariffs and taxes

Eirik S. Amundsen (), Peder Andersen () and Jørgen Birk Mortensen ()
Additional contact information
Eirik S. Amundsen: University of Bergen, Department of Economics, Postal: Institutt for økonomi, Universitetet i Bergen, Postboks 7802, 5020 Bergen, Norway
Peder Andersen: Department of Food and Resource Economics, University of Copenhagen
Jørgen Birk Mortensen: Department of Economics, University of Copenhagen

Abstract: Instruments chosen to pursue climate related targets are not always efficient. In this paper we consider an economy with three climate related targets for its electricity generation: a given share of “green” electricity, a given expansion of “green” electricity, and a given reduction of “black” (fossil based) electricity. At its disposal the country has three instruments: an allowance system (tradable green certificates), a subsidy system (feed-in tariffs) and a Pigouvian fossil tax. Each of these instruments may be used to attain any of the given targets. Within the setting of the model it is verified that each kind of the target has only a single efficient instrument under certainty, and that there is a deadweight loss of using other instruments to achieve the target. Similarly, there is also an analysis of instrument choice when several targets are to be attained at the same time. The paper also discusses the case of simultaneous targets as well as the relevance of the various targets.

Keywords: energy policy; green certificates; subsidies; Pigouvian taxes; climate change

JEL-codes: C70; Q28; Q42; Q48

32 pages, April 18, 2018

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