Are the interactions between the EU's
RES support and ETS really so negative?
Pablo del Río
Environmental Economics group
Institute of Public Policies and Goods,
Consejo Superior de Investigaciones Científicas
pablo.delrio@csic.es
Ottawa, 2nd October 2015
Analysis based on…
Journal publications:
 DEL RÍO, P. (2009). “Interactions between climate and energy policies: the case of
Spain”. Climate Policy 9(2), 119–138
 DEL RIO, P. (2012). The dynamic efficiency of feed-in tariffs. The impact of different
design elements. Energy Policy 41, 139-151.
 DEL RÍO, P., HOWLETT, M. (2013). Beyond the “Tinbergen Rule” in Policy Design:
Matching Tools and Goals in Policy Portfolios. Annual Review of Policy Design 1, 1-16.
 DEL RÍO, P. (2014). On evaluating success in complex policy mixes: the case of
renewable energy support schemes. Policy Sciences 47(3) , 267-287
 HOWLETT, M., PUNG HOW, Y., DEL RIO, P. (2015). The parameters of policy portfolios:
verticality and horizontality in design spaces and their consequences for policy mix
formulation. Environmental and Planning C: Government and Policy (forthcoming).
EU-funded projects:
 BEYOND2020 project. http://www.res-policy-beyond2020.eu/
 TOWARDS2030 project. http://towards2030.eu/
 AURES. http://aures.eu/
Index
 THE MAINSTREAM ECONOMIC VIEW:
 1) RES targets crowd out cheap mitigation alternatives.
 2) Conflicts due to the negative impact on the carbon price.
 THE ALTERNATIVE ECONOMIC VIEW:
 3) A policy mix is needed for strictly economic reasons.
 Insights from innovation economics and SI.
 Insights from Public Choice and political economy.
 Model simulations.
 4) Beyond a narrow and static perspective on efficiency.
 Dynamic efficiency.
 Different goals and assessment criteria.
 5) The empirical evidence does not support a negative interaction.
 6) The role of coordination, instrument choice and design elements.
 CONCLUSION.
THE MAINSTREAM ECONOMIC VIEW
1) RES targets crowd out cheap mitigation
alternatives.
Dedicated RES-E policy should not be added to an
ETS.
Such combination is:
 Ineffective. CO2 emissions covered under the cap.
Inefficient. Higher compliance costs.
Picking winners.
Technology neutrality.
THE MAINSTREAM ECONOMIC VIEW
2) Conflicts due to the negative impact on the
carbon price.
“Green promotes the dirtiest” (Böhringer and
Rosendahl 2009)
RES-E generation as a result of deployment
policies results in lower CO2 prices which benefit
the most carbon-intensive fossil-fuel generators.
This lower price decreases investments and/or
innovation efforts aimed at low emission
technologies in sectors covered by the ETS.
THE ALTERNATIVE ECONOMIC VIEW
 3) A policy mix is needed for strictly economic
reasons.
3.1. Insights from innovation economics and SI.
 An environmental externality.
 An innovation externality.
 A diffusion externality.
 Multiple market failures require multiple instruments.
 A policy with a CO2 price could only internalize the
environmental externality, not the other two.
 ETS: insufficient incentive for innovation. Supply-push
and demand-pull.
THE ALTERNATIVE ECONOMIC VIEW
 3) A policy mix is needed for strictly economic reasons.
3.2. Insights from Public Choice and political economy.
 Are credible carbon prices at sufficiently high levels
politically feasible?
 Climate policy: temporal asymmetry of benefits and
costs. “Not-in-my-term-in-office” syndrome.
 Lobbyism: influence of powerful interest groups (e.g.,
the incumbents in the energy sector).
THE ALTERNATIVE ECONOMIC VIEW
 3) A policy mix is needed for strictly economic
reasons.
3.3. Model simulations.
 Unless meaningful/binding emissions reductions are agreed at a
global level, a second-best strategy based on strong support for
RETs will lead to lower costs than in the case of a delayed climate
agreement without early deployment of RETs (Bauer et al 2012).
 Strong RET deployment may provide a hedge against low
stabilization targets (Lecuyer and Quirion 2013).
 if there is a risk that the carbon price drops to zero it can be
socially beneficial to implement an additional instrument
encouraging emissions reduction (RES support).
THE ALTERNATIVE ECONOMIC VIEW
 4) Beyond a narrow and static perspective on
efficiency.
Dynamic efficiency.
 A cost-effective approach to achieve short-term targets: not
necessarily the most cost-effective approach to achieve 2050
targets.
 Model simulations: promoting technological changes may be
costly in the short term, but cheaper in the long-term (Huber et al
2007).
 Putting technologies “on the shelf” vs. taking technologies
“from the shelf” (Azar and Sanden 2011).
THE ALTERNATIVE ECONOMIC VIEW
 4) Beyond a narrow and static perspective on efficiency.
Different goals and assessment criteria.
 Policy makers take several assessment criteria into account
when implementing energy policies.
 Combinations may be justified if a less efficient instruent is more
politically feasible.
 Policy-makers have other goals apart from CO2 mitigation.
 Combinations of instruments may be justified if they address
different goals, which cannot be achieved with only one instrument.
 The combination : higher compliance costs with the CO2 target
but not necessarily higher costs to reach all the goals jointly.
THE ALTERNATIVE ECONOMIC VIEW
5) The empirical evidence does not support a
negative interaction
 The socioeconomic benefits of adding a RES
target to an ETS might compensate the
additional efficiency costs.
 Modest impact of RES on the CO2 emissions
reductions and low ETS prices in the last
decade with respect to other factors: Ellerman
2013, Ellerman and Buchner 2008, Spencer et al 2014, EC 2014.
THE ALTERNATIVE ECONOMIC VIEW
 6) The role of coordination, instrument choice and
design elements.
Coordination.
 Ex-ante coordination: the problem of reducing CO2
emissions as a result of RES-E deployment would be
mitigated and a lower carbon price would not result.
 Have the targets been coordinated in the EU?
THE ALTERNATIVE ECONOMIC VIEW
 6) The role of coordination, instrument choice and design
elements.
Instrument choice.
 The results of the interactions depend on whether the instruments are
quantity-based or price-based.
 RES-E support instruments:
 The negative interaction is due to an effective reduction of the stringency
of the CO2 cap as a result of RES-E generation.
 TGCs have empirically shown to be less effective than FITs
 Coordination between the RES-E and CO2 targets are easier under a
quantity-based RES-E instrument than under a price-based one.
 CO2 mitigation instruments:
 Negative interactions are mitigated with a carbon tax.
THE ALTERNATIVE ECONOMIC VIEW
 6) The role of coordination, instrument choice and
design elements.
Design elements.
 The specific impacts of a RES-E support instrument are
mediated by the design elements of the instruments: a
remuneration cap in FIPs.
 ETS: a floor price.
CONCLUSIONS
 The coexistence of the RES target with the
EU ETS has received considerable criticism in
the past.
 Such criticism is flawed if different
approaches in the economic literature and
not only a narrow, short-term perspective of
static efficiency are considered.
 Several implications at different levels.
CONCLUSIONS
 At the analytical and methodological level:
 A plea for methodological pluralism
 need to combine different economic perspectives.
 A broader, multidisciplinary economic analysis of
the climate and energy policy mix.
 Insights from innovation studies and political economy
approaches are crucial in understanding why different
policies are combined.
CONCLUSIONS
 Regarding policy implications,
 1) The policy mix of an ETS and RES targets is clearly
justified. The existence of different market failures,
goals and assessment criteria means that
combinations are required.
 In contrast to the mainstream view: take into account
the non-CO2 benefits of RES as the main goal of its
deployment and consider the CO2 emissions reductions
as its side effect, adapting the CO2 cap accordingly.
CONCLUSIONS
 Regarding policy implications
 2) The mainstream view: RES deployment has a
negative impact on carbon prices.
 However, since RES-E deployment has a depressing
effect on the carbon price, RES-E support could make it
more politically feasible to implement more stringent
CO2 targets.
CONCLUSIONS
 Regarding policy recommendations,
 3) Both types of policies (an ETS and dedicated RES
support) could mutually reinforce each other, rather
than conflict.
 The carbon price in an ETS would reduce the
amount of funds devoted to RES promotion in a
dedicated RES policy.
 And dedicated RES support would put currently
expensive technologies on the shelf to achieve
substantial l/t emissions reductions at low costs.
CONCLUSIONS
 Policy combinations: not a panacea.
 Combinations bring problems, including regulatory capture,
overlaps and interactions (conflicts).
 However, rather than restricting the discussion to a unidimensional problem, this calls for an integrated approach to
climate and energy policy.
 Therefore, the issue is not whether targets and instruments should
be combined, but rather how the policy mix should look like
 The mix:
 Efficient, effective, socially acceptable and politically feasible.
 Appropriate balance between demand pull and technology push policies
and, in particular, between support for R&D and deployment.
Pablo del Río
Instituto de Políticas y Bienes Públicos, CSIC
pablo.delrio@csic.es
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