Marketable pollution permits with intermittent energy sources

  

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Abstract

We develop a highly stylized model of investments to provide a characterization of socially optimal investment in renewable technologies and dispatch of conventional and renewable capacity. We show that the optimal investment in intermittent renewable technologies can be explicitly calculated and that it is optimal to keep some conventional capacity in reserve for topping when renewable sources are lacking. We also analyze the efficiency of marketable pollution permits in decentralizing the socially optimal outcomes in a competitive market with a spot markets. The paper shows that an optimal investment in the intermittent technologies can not be implemented under perfect competition if the emission cap is fixed. However we show that to implement the second-best solution, the emission cap should be lower than in the optimal state. Keywords: Electricity, Intermittency, Emission allowance markets, Renewable Energy, Pollution.

JEL: D24, D61, Q41, Q42, Q48.

Introduction

The electricity sector is one of the most polluting sectors because of the greenhouse gas emissions that it generates by using fossil fuels. This sector has therefore attracted considerable attention in the debate on climate change mitigation. Public policies have been launched worldwide to green the electricity production by substituting pollutant energy sources by renewable one such such as wind and solar power. Therefore, the increasing interest given to green the electricity production, has heightened the need to analyze the efficiency of implemented tools to achieve environmental goals.

Among the policy measures that help to tackle this problem,emission allowance markets. These environmental tools are very popular, and are often considered as an efficient instrument. They have been widely applied to different kind of environmental issues in the last decades. This mechanism offers a number of advantages which are attractive for business and policymakers. Hence our interest in analyzing its effectiveness in the context of the electricity sector.

The concept of the emission trading was introduced by Dales(1968), based on the Coase solution who proposed a solution that consists in establishing property rights on emission of externalities. Based on the Coasian approach, market-based instruments have been popularized as an efficient way to reduce pollution. They work with a central authority which sets a cap on the total amount of pollu