Redistribution Effects of Energy and Climate Policy: The Electricity Market

33 Pages Posted: 10 Dec 2012

See all articles by Lion Hirth

Lion Hirth

Neon Neue Energieökonomik GmbH; Hertie School of Governance

Falko Ueckerdt

Potsdam Institute for Climate Impact Research

Date Written: December 10, 2012

Abstract

Energy and climate policies are usually seen as measures to internalize externalities. However, as a side effect, these policies redistribute wealth between consumers and producers, and within these groups. While redistribution is seldom the focus of the academic literature in energy economics, it plays a central role in real world policy debates. This paper compares the redistribution effects of two major electricity policies: support schemes for renewable energy sources, and CO2 pricing. We find that the redistribution effects of both policies are large, and they work in opposed directions: while renewables support transfers wealth from producers to consumers, carbon pricing does the opposite. More specifically, we show that moderate amounts of wind subsidies leave consumers better off even if they bear the costs of subsidies. In the case of CO2 pricing, we find that while suppliers as a whole benefit even without free allocation of emission certificates, large amounts of producer surplus are redistributed between different types of producers. These findings are derived from an analytical model of electricity markets, and a calibrated numerical model of the Northwestern European integrated power system. Our findings imply that a society with a preference for avoiding large redistribution might prefer a mix of policies, even if CO2 pricing alone is the first best climate policy in terms of allocative efficiency.

Keywords: carbon tax, emission trading, redistribution, consumer surplus, producer surplus, wind power generation, electricity market modelling

JEL Classification: Q42, Q48, L94, H23, D61, D62, C61, C63

Suggested Citation

Hirth, Lion and Ueckerdt, Falko, Redistribution Effects of Energy and Climate Policy: The Electricity Market (December 10, 2012). FEEM Working Paper No. 82.2012, Available at SSRN: https://ssrn.com/abstract=2187226 or http://dx.doi.org/10.2139/ssrn.2187226

Lion Hirth (Contact Author)

Neon Neue Energieökonomik GmbH ( email )

Karl-Marx-Platz 12
12043
Berlin, 12043
Germany

HOME PAGE: http://www.neon-energie.de

Hertie School of Governance ( email )

Friedrichstraße 180
Berlin, 10117
Germany

Falko Ueckerdt

Potsdam Institute for Climate Impact Research ( email )

Telegraphenberg
Potsdam, Brandenburg 14412
Germany

HOME PAGE: http://www.pik-potsdam.de/pik-frontpage?set_language=en

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