Hurra for Green Electricity!

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.