Scandinavian Working Papers in Economics

Working Paper Series,
Norwegian University of Life Sciences, School of Economics and Business

No 01-2016: Strategic technology policy as a supplement to renewable energy standards

Fischer Fischer , Mads Greaker and Knut Einar Rosendahl ()
Additional contact information
Knut Einar Rosendahl: School of Economics and Business, Norwegian University of Life Sciences, Postal: Norwegian University of Life Sciences, School of Economics and Business, P.O. Box 5003 NMBU, N-1432 Ås, Norway

Abstract: In many regions, renewable energy targets are a primary decarbonization policy. Most of the same jurisdictions also subsidize the manufacturing and/or deployment of renewable energy technologies, some being su¢ ciently aggressive as to engender WTO disputes. We consider a downstream energy-using prod- uct produced competitively but not traded across regions, such as electricity or transportation. A renewable energy technology is available, provided by a limited set of upstream suppliers who exercise market power. With multiple market fail- ures (emissions externality and imperfect competition), renewable market share targets as the binding climate policy, and international trade in equipment, the stage is set to examine rationales for green industrial policy. Subsidies may be provided downstream to energy suppliers and/or upstream to technology sup- pliers; each has tradeo¤s. Subsidies can o¤set underprovision upstream, but they allow dirty generation to expand when the portfolio standard becomes less binding. Downstream subsidies raise all upstream pro…ts and crowd out foreign emissions. Upstream subsidies increase domestic upstream market share but expand emissions globally. In our two-region model, strategic subsidies chosen noncooperatively can be optimal from a global perspective, if both regions value emissions at the global cost of carbon. But if the regions su¢ ciently undervalue global emissions, restricting the use of upstream subsidies can enhance welfare.

Keywords: Strategic technology policy; Renewable energy standard; Upstream technology market

JEL-codes: H23; L13; Q54

37 pages, January 11, 2016

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