Renewable support and CO2 abatement in open economies – the role of price discrimination

Weber, C.; Woll, O.; Schober, D.
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IAEE Perth 2012
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A global GHG certificate trading system (or alternatively a Pigou tax) is recognized as the first best instrument for combating Global Warming in textbook economics. Currently such a system is yet not in place and is at best expected for 2020. For various reasons however some countries (notably the EU) are willing to adopt a frontrunner approach. Yet it is questionable whether going for a pure certificate trading system is the best choice under such circumstances. As an alternative, specific support schemes for carbon free technologies like renewables may be envisaged, e. g. feed-in tariffs or renewable quotas ( labeled renewable performance standards in the U.S.). Two potential advantages of such support schemes for renewables shall be investigated in this paper: On the one hand the possibility to use price discrimination between producers to cut down producer rents and on the other hand the possibility to apply price discrimination on the customer side. The latter is typically done for the financing of the support scheme - avoiding carbon leakage by crowding out of energy intensive industry. These potential advantages have to be weighted against the distorting effects of renewable support on carbon prices.