Optimal taxation with intermittent generation


The paper analyses the development of the intermittent technologies to produce electricity, facing the competition of the incumbent sector, using conventional technologies. In our analysis of the interaction between these two sectors, we consider the environmental damage caused by the electricity production from fossil fuel. This allowed us to represent the social cost of electricity production. We show that it is socially favorable to keep some conventional capacities in reserve. We then investigate the efficiency of environmental taxes in the internalization of the environmental damage. The paper shows that there is not a rate tax capable of implementing the first-best equilibrium. Effectively, this requires a variable tax rate, which seems unrealistic in practice. We also determine the constrained second-best equilibrium and the tax rate that decentralizes it. Interestingly, we find that the interaction between a retail price and tax, both constant and the intermittency of renewable energy, yield to two phenomena that, on average, promote the investment in intermittent capacities.

Keywords: Electricity, Intermittency, Tax, Renewable Energy, Pollution.

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