Ups and Downs: How Economic Growth Affects Policy Interactions

22 Pages Posted: 30 Sep 2013

See all articles by Florens Flues

Florens Flues

Organization for Economic Co-Operation and Development (OECD)

Andreas Löschel

University of Muenster - Chair of Microeconomics, esp. Energy and Resource Economics

Benjamin Johannes Lutz

ZEW – Leibniz Centre for European Economic Research

Oliver Schenker

Frankfurt School of Finance & Management gemeinnützige GmbH

Date Written: August 8, 2013

Abstract

Current climate and energy policy has to operate under an ex-ante unforeseen economic crisis. An obvious consequence is the collapse of prices for carbon emission allowances as, for example, seen in the European Union. However, this price collapse may be amplified by the interaction of a carbon emission cap and supplementary policy targets such as the minimum shares for renewables in the power sector. The static interaction between climate and renewable policies has been discussed extensively. This paper extends this debate by analyzing how uncertain differences in medium to long-run growth rates affect the efficiency and effectiveness of a policy portfolio containing an emission trading scheme and a target for a minimum renewable share. Making use of a simple partial equilibrium model we identify an asymmetric interaction of emissions trading and renewable quotas with respect to di fferent growth rates of an economy. The results imply that unintended consequences of the policy interaction may be particularly severe and costly when economic growth is low and that carbon prices are more sensitive to changes in economic growth if they are applied in combination with renewable energy targets. Our main example for the policy interaction is the EU, yet our research also relates particularly well to the uncertainty of economic growth in fast growing emerging economies like China.

Keywords: EU climate policy, Growth uncertainty, Overlapping regulation

JEL Classification: Q43, Q48, Q58

Suggested Citation

Flues, Florens and Löschel, Andreas and Lutz, Benjamin Johannes and Schenker, Oliver, Ups and Downs: How Economic Growth Affects Policy Interactions (August 8, 2013). ZEW - Centre for European Economic Research Discussion Paper No. 13-066, Available at SSRN: https://ssrn.com/abstract=2333574 or http://dx.doi.org/10.2139/ssrn.2333574

Florens Flues (Contact Author)

Organization for Economic Co-Operation and Development (OECD) ( email )

2 rue Andre Pascal
Paris Cedex 16, 75775
France

Andreas Löschel

University of Muenster - Chair of Microeconomics, esp. Energy and Resource Economics ( email )

Universitätsstr. 14-16
48143 Munster
Germany

HOME PAGE: http://www.wiwi.uni-muenster.de/eroe

Benjamin Johannes Lutz

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

Oliver Schenker

Frankfurt School of Finance & Management gemeinnützige GmbH ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

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