Second-best theory and the use of multiple policy instruments

Bennear, Lori S.; Stavins, Robert N.

doi:10.1007/s10640-007-9110-y

Cited by 255 publications

(147 citation statements)

References 83 publications

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“…Basically, there are two strands of argumentations for implementing renewable energy specific policies: one is based on efficiency grounds, the other relies on pragmatic considerations promoting second-best policies that are politically more feasible (see Bennear and Stavins (2007) for a general discussion of the use of second-best instruments). The first argumentation claims that the energy sector is subject to multiple externalities like carbon emissions, local air pollution, innovation and learning spillovers, imperfect competition, network effects or energy security concerns (e.g.…”

Section: Introductionmentioning

confidence: 99%

“…Distributional concerns and practical and information constraints for compensation may be the most important reason why carbon pricing has not yet been stringent if imposed at all. If exogenous constraints impede the implementation of the first-best instrument, a second-best approach can be a valuable alternative (Bennear and Stavins 2007). In particular, technologyoptimistic considerations about the progress of the learning renewable energy technologies might lead to the perception that a temporary renewable deployment stimulus could be a more manageable way to foster mitigation.…”

Section: Introductionmentioning

confidence: 99%

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Renewable Energy Subsidies: Second-Best Policy or Fatal Aberration for Mitigation?

2011

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SummaryThis paper evaluates the consequences of renewable energy policies on welfare, resource rents and energy costs in a world where carbon pricing is imperfect and the regulator seeks to limit emissions to a (cumulative) target. We use a global general equilibrium model with an intertemporal fossil resource sector. We calculate the optimal second-best renewable energy subsidy and compare the resulting welfare level with an efficient first-best carbon pricing policy. If carbon pricing is permanently missing, mitigation costs increase by a multiple (compared to the optimal carbon pricing policy) for a wide range of parameters describing extraction costs, renewable energy costs, substitution possibilities and normative attitudes. Furthermore, we show that small deviations from the second-best subsidy can lead to strong increases in emissions and consumption losses. This confirms the rising concerns about the occurrence of unintended side effects of climate policy { a new version of the green paradox. We extend our second-best analysis by considering two further types of policy instruments: (1) temporary subsidies that are displaced by carbon pricing in the long run and (2) revenue-neutral instruments like a carbon trust and a feed-in-tariff scheme. Although these instruments cause small welfare losses, they have the potential to ease distributional conflicts as they lead to lower energy prices and higher fossil resource rents than the optimal carbon pricing policy. Abstract This paper evaluates the consequences of renewable energy policies on welfare, resource rents and energy costs in a world where carbon pricing is imperfect and the regulator seeks to limit emissions to a (cumulative) target. We use a global general equilibrium model with an intertemporal fossil resource sector. We calculate the optimal second-best renewable energy subsidy and compare the resulting welfare level with an efficient first-best carbon pricing policy. If carbon pricing is permanently missing, mitigation costs increase by a multiple (compared to the optimal carbon pricing policy) for a wide range of parameters describing extraction costs, renewable energy costs, substitution possibilities and normative attitudes. Furthermore, we show that small deviations from the second-best subsidy can lead to strong increases in emissions and consumption losses. This confirms the rising concerns about the occurrence of unintended side effects of climate policy -a new version of the green paradox. We extend our second-best analysis by considering two further types of policy instruments: (1) temporary subsidies that are displaced by carbon pricing in the long run and (2) revenue-neutral instruments like a carbon trust and a feed-in-tariff scheme. Although these instruments cause small welfare losses, they have the potential to ease distributional conflicts as they lead to lower energy prices and higher fossil resource rents than the optimal carbon pricing policy. Keywords

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Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Renewable Energy Subsidies: Second-Best Policy or Fatal Aberration for Mitigation?

2011

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“…This results in an environment where poorly coordinated policies, policies that directly oppose one another, or policies that are implemented in law but not enforced in practice can and do exist simultaneously. This leads to a policy environment that is sometimes characterised as being of a "second-best" nature ( [49] and [50]), in contrast to the idealised "first-best" policymaking often found in models.…”

Section: Behavioural Dynamics Between Actors and Institutionsmentioning

confidence: 98%

Actors behaving badly: Exploring the modelling of non-optimal behaviour in energy transitions

2017

Energy Strategy Reviews

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There are real political and social barriers to climate mitigation that arise from multiactor dynamics and micro-economic decisions. Exploratory analysis that captures key uncertainties in the energy system, including behaviour, is crucial for policy design aimed at achieving ambitious greenhouse gas (GHG) mitigation targets. This paper explores the case for developing policy assessments that include non-optimal behaviour in energy systems modelling. A stochastic system dynamic model of the energy system that features multiple actors with differentiated behaviours is used to investigate energy transition pathways that deviate from strict economic rationality. The results illustrate the risks of basing GHG reduction strategies on analysis that overlooks key insights into decision making from fields such as behavioural economics and political science. KeywordsEnergy systems modeling; climate policy; decarbonization; behavioral economics; uncertainty; Highlights• Dynamic stochastic model of energy transitions used to explore actor behaviour • Uncertainty analysis explores impact of sub-optimal actor choices and policies • Behaviour could be as significant as the techno-economic drivers of transitions • Climate targets difficult to achieve without idealised assumptions about behaviour • Energy systems modelling must expand consideration of socio-political factors

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“…If we take into account both types of pollution into a same model the conclusion is different and the effect of a tax on transport is in contradiction with the defensive behavior by households suffering from industrial pollution. Using the words of Bennear and Stavins (2007), the multiple markets failure are jointly reinforcing, meaning that the correction of one market failure exacerbates welfare loss from the other. This paper departs from the previous literature by developing a theoretical model incorporating two environmental externalities that interact through land market in an explicit spatial setting.…”

Section: Introductionmentioning

confidence: 99%

Urban Structure and Environmental Externalities

Régnier

Legras

2017

Environ Resource Econ

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The objective of this paper is to analyze policy design for air pollution management in the spatial context of urban development. We base our analysis on the paper of Ogawa and Fujita (1982), which offers a proper theoretical framework of non-monocentric urban land use using static microeconomic theory where the city structure is endogenous. First, we show that when households internalize industrial pollution in their residential location choice, spatialization within the city is reinforced. This impacts directly the emissions of greenhouse gases from commuting. Then, we analyze policy instruments in order to achieve optimal land use pattern when the policy maker has to manage both industrial and commuting related polluting emissions, that interact through the land market.JEL classification : Q53, D62, R14

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Second-best theory and the use of multiple policy instruments

Cited by 255 publications

References 83 publications

Renewable Energy Subsidies: Second-Best Policy or Fatal Aberration for Mitigation?

Renewable Energy Subsidies: Second-Best Policy or Fatal Aberration for Mitigation?

Actors behaving badly: Exploring the modelling of non-optimal behaviour in energy transitions

Urban Structure and Environmental Externalities

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