Are green certificates the solution?

1. Are green certificates the solution? Rolf Golombek MILEN May 19, 2010

2. Questions • Can we leave energy decisions to the market? • If so, why use market-based instruments? • Which market-based instruments should be used? • Green certificates vs. subsidy vs. tradabel permits • White certificates

3. Leave it to the market?Feed-in tariffs in GermanyRenewable electricity production • What: Guaranteed minimum price to producer • When: Startet in 1991, revised several times • Support: • Wind: 8 cent/KWh (Producer price is roughly 4 cent) • Solar: 8 – 50 cent/KWh • 20 years • Renewable technologies differ • Predictions

4. Production of wind power and solar power in Germany

5. Feed-in tariffs – Lesson? • Profitable investments are undertaken • Economists believe in incentives and rational producers

6. What is so great about the market? • Under ideal conditions; the market outcome coincides with the social optimum • Correct amount of resources spent on production of each type of good • Cost efficiency; a given level of production is achieved at the lowest possible cost. • One requirement: All agents face the same prices • Market imperfections • Externalities; harmful emissions, spillovers • Can often be corrected by taxes or subsidies • Price pluss tax should not differ across agents • The adjusted outcome coincides with the social optimum.

7. Green certificates - concept • Sounds great! • Not that easy to understand • Typically linked to electricity markets • Green electricity producers sell certificates • Buyers of electricity required to buy certificates • Mandatory share • Alternative: Brown producers required to buy • Market for certificates – market based instrument

8. Green certificates – behind the veil • Green producers receive an additional income • Works like a subsidy • Buyers have an additional cost • Works like a tax • The market determines the price of electricity and certificates; demand and supply • Increased supply of green power→lower price of electricity → brown producers loose

9. Green certificates – efficiency relative to GHG emissions • Efficiency: Price charged to emit CO2 should not differ across agents • Treat all sources of CO2 equally • Brown producers are punished • Same punishment per KWh, not per unit of CO2 • Do all brown producers emit CO2? • Optimal: Lower production of brown power • Punish brown producers • do not directly (through an instrument) increase green power • Greeen producers receive a subsidy • Green production is increased • Too much resources are used to produce green power • Norway: Almost no GHG emissions in electricity generation!

10. Green certificates – two policy targets • Targets: Lower emisson of CO2, more green power (why?) • Standard economic theory: • One common price on all CO2 emisions • Support to green power • Optimal policy instruments • One common CO2 tax • Subsidy to green power • Green certificates • Not efficient wrt. lower CO2 emissions • Not efficient to finance a green subsidy entirely through a tax on consumption of electricity

11. Can green certificates be an efficient policy measure? • Suppose there is a target for green power • If target is related to amount of green power • use a subsidy, not green certificates • If target is specified as a share; per cent of electricity consumption that is delivered by green power • Green certificates are efficient • Why have, like EU, such a policy goal? • How will the mix of all policy instruments work? • Will overall efficiency/welfare be significantly improved?

12. White certificates - concept • Not well known, but used in some countries • Improve energy efficiency • Alternative to other instruments like taxes • Agents are obliged to reach a certain amount of energy savings • Must calculate the savings (correct for other factors) • ”The market actor receives certificates for saving achieved, which can be used for their own target compliance or can be sold to (other) obliged parties.” • Is this clear?

13. White certificates - questions • Should improved energy efficiency be a policy goal? • If so, do not agents have the right incentives? • If not, why not correct the prices through taxes etc? • Huge transaction costs • Calculate a baseline (present energy consumption) • Labor has alternative use and value • The market for white certificates?

14. Consumers and energy decisions - Experimental economics • Hard for many to calculate savings based on increased gas efficiency of cars • Two refrigerators; differ with respec to price and energy efficiency. 50 % choose the cheapest one, although after one year total costs have become higher • Installation of an orb in private houses - peak demand decreased by 40 % • Energy savings program (ENØK) • Most important factor is relative consumption • Information; convergence both ways • Solution: Information and a smile • Are white certificates the solution? • Standards for energy equipment, buildings etc.?

15. Conclusion • Economists typically ”believe” in the market • Maybe not for consumer durables • Economists rank market-based instruments • Green certificates are typically not efficient • Exception: Target specified as a share • Why such a target? • GHG is a big problem; use efficient instruments, not a large number of inefficient instruments • If possible; do it simple, use taxes and subsidies - why is that so difficult?