Some economists argue that support for renewable electricity leads to more coal power. Their reasoning is curiously flawed and oversees the crucial role of technological learning.
A curious discussion about climate policy has arisen in Norway now that the country has agreed with Sweden to join Sweden’s ”green certificate” market (a.k.a. el-certificate, similar to the renewable portopholio standard) . This policy tool creates de-facto a niche-market for specific kinds of renewable energy, which are traded at higher prices than on the spot market for electricity. Economists like Böhringer and Rosendahl, Michael Hoel and Odd Godal (DN 9 and 11 Sept.) now argue that the increased production of renewable electricity in Nordic countries will have no effect on the emissions of greenhouse gases in Europe, and it may even contribute to increasing greenhouse gas emissions globally by leading to a reduced price of fossil fuels.
On some level, the argument is really silly: Since lawmakers have set absolute limits on the allowed emissions, reduced production of coal-based electricity in Scandinavia will free up emissions allowances which will be used somewhere else in Europe to emitt CO2. The support for renewable energy hence undercuts other emissions-reducing efforts. Of course, the same argument can be applied to any emissions-reducing effort anywhere within the EU’s cap! If the argument is hence followed through and applied everywhere, everybody would stop their emissions-reduction efforts, and there would be no reduction at all. Europe would fail it’s goals to reduce emissions. Renewable electricity is one of the many measures required to achieve emissions reduction targets and is hence not futile.
Of course the econmists could respond that I misread their argument, which could be more subtle than it comes across in the media: Dedicated support for renewable electricity reduces the quota price (which is part of the argument) and hence leads to a shift in what measures are adopted to achieve the goal. Instead of energy conservation in Poland, you get wind power in Norway, but on total the measures are (not necessarily, but possibly) more expensive. That’s fair, in the economists’ idealized world, having one emissions price as the only policy tool to achieve emissions reductions is most efficient. However, this oversees some crucial realities.
First and foremost, there are other criteria than efficiency which affect the desirablity of a policy, such as political feasibility and distributive justice. There is a limit to level of carbon and electricity price that is politically acceptable, and that limit varies by country. Poland has already managed to negotiate concessions from other EU countries: a large allottment of free emissions allowances their coal-fired power plants. Sharing the pain of emissions reductions means that also in countries high cost level measures will have to be implemented, even if they are more expensive.
Second, if it is easier to achieve the emissions reductions aimed for in 2012, the ambition level for the next period will be higher. Hence, the amount of emissions is not really fixed as the reasoning of Böhringer and Rosendahl implies, but depends on the ease and success of effort to reduce emissions, and the green certificates will help this effort. Besides, the installed renewable plants will be in operation beyond the time horizon of existing cap-and-trade systems.
Third, carbon pricing strategies such as the EU’s Emissions Trading System lead to windfall profits: anybody who already has low-emissions power production such as large hydro or nuclear plants profits from the resulting increase in electricity price. The amount of money redistributed to owners of existing facilities is much larger than the investment costs for the required emissions reductions, as I have argued elsewhere. Of course t here are other arguments for high electricity prices, as these lead to conservation. However, this can be achieved through taxes which benefit the general public instead of multi-billion Euro windfall profits for power companies. By reducing the quota and hence electricity price, subsidies for renewables reduce the windfall profits of power companies, which should be seen as a good thing.
Fourth and most importantly, niche markets are required for new technologies to mature and bring down cost. As Wright has shown in an analysis of the cost of making air planes published in 1936, costs are reduced with cumulative production because of technological learning. This has been extensively documented also for energy technology: for successful technologies, a doubling of cumulative production brings on average a 20% reduction in per-unit cost (Figure source) Niche markets are required to provide an opportunity for improving the technology, working out the kinks, developing the organisation of new value chains. Policy support for nacent technologies is hence justified by long-term benefits that the development of these technologies brings. While this ”technology learning” rationale has been central for creating the green certificate markets and similar policy initatives, it has been totally ignored in the economists’ arguments against these instruments.
While I don’t think that renewables alone are sufficient to stop climate change and more fundamental changes to our economies are required, they are an indispensible element of any climate strategy. Green certificates could be criticized for being less effective in supporting new technology than feed-in tariffs, the successful approach taken e.g. by Germany, but better some support than none.