Optimal Renewable Energy Policies over Time: Policy Commitment vs. Policy Discretion
Final Report Abstract
When implementing policies to address climate change, policy-makers face a fundamental trade-off: On the one hand, they need to commit to long-term credible rules for climate and energy policy. Otherwise, the threat of opportunistic policy-making in the future will impair investments into lowcarbon technologies. On the other hand, policy-makers may want to reserve some degrees of freedom to adjust environmental policies because the future benefits and costs of decarbonization are subject to substantial uncertainties. Thus, there may also be societal gains from allowing policymakers the discretion to adjust the policies as new information becomes available. This research examines how this trade-off between policy commitment and discretion affects the optimal intertemporal design of policies to support the deployment of renewable energy sources. Using a dynamic partial equilibrium model of the power sector, it is shown that commitment to statecontingent renewable subsidies is the first-best policy choice. In this case, a policy rule is defined which explicitly relates future subsidy levels to possible states of the world (i.e., a specific level of benefits or costs from renewable deployment). However, this policy approach may not be perfectly feasible in practice as it is very demanding for policy-makers in terms of information (possible future states need to be identified in advance and monitored properly). Most likely, policy-making will boil down to either unconditional commitment (a fixed renewable subsidy path is determined for the future, only based on today’s knowledge) or discretion (high degree of freedom for future policy adjustments). The choice between unconditional commitment and discretion is analytically ambiguous. A numerical illustration with naïve assumptions suggests that policy discretion may outperform unconditional commitment in terms of welfare. However, extensions to more realistic cases where only a limited fraction of climate uncertainty resolves, where future policy-makers have own agendas, or with risk-averse investors show commitment as favorable. Consequently, the research project confirms the value of long-term climate policy commitment, even if the future benefits and costs of decarbonization are uncertain.
Publications
- (2017). Commitment vs. Discretion in Climate and Energy Policy, CESifo Working Paper No. 6355
Habermacher, F., Lehmann, P.
