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Nov 30th 2015, 9:48 by STEFAN AMBEC AND CLAUDE CRAMPES | TOULOUSE SCHOOL OF
ECONOMICS
THE world's economies have not been idle in the face of climate change.
Companies and consumers are endeavouring to reduce their carbon footprint by
investing in energy efficiency and changing their travel plans. Financial
institutions are pressed to disinvest shares in fossil fuel industries by the
Keep it in the ground campaign launched by NGOs and the media. In the last
decade many countries, particularly EU Member States, have invested heavily in
renewable energy sources such as wind and solar power, through generous feed-in
tariffs, public tenders and mandatory renewable portfolio standards. China
installed about 23 terawatts of new wind power capacity in 2014, almost half of
the 53 terawatts installed worldwide. Rich countries have pledged to contribute
up to $10 billion a year to the UN Green Climate Fund, with the aim to
eventually reach $100 billion. This money is to be used to assist developing
countries in adaptation and mitigation practices.
Spending money has proven easier than pricing carbon, as economists would
prefer. It seems unlikely that the COP 21 participants will reach consensus on
taxing carbon dioxide emissions or setting tradable emission permits. They seem
more inclined to subsidise the reduction of greenhouse gas emissions than to
penalise their production. Will this prove successful? Can we avoid pricing
carbon by massive public support for decarbonised sources of energy? Economic
analysis suggests that the answer is no.
In a recent paper we investigated the impact of subsidies to renewable sources
of energy, particularly feed-in tariffs, on the energy mix. Solar and wind
power sources are intermittent in that the electricity produced from wind
turbines and photovoltaic panels varies over time and weather conditions. This
makes power dispatching challenging because electricity is not storable on a
large scale. Electricity must therefore be produced at the same time it is
consumed. In other words, supply must match demand in real time. The fact that
most consumers read a constant price in their electricity bill does not help:
the price does not reflect variations in supply and therefore even consumers
who could react to supply variability do not. Intermittency in electricity
supply combined with a retail electricity price that is constant in time forces
electricity providers to back-up new wind farms and PV installations with
reliable sources of energy, mostly thermal power plants burning fossil fuel.
The support to renewable energy through generous feed-in tariffs and ambitious
renewable portfolio standards does increase investment in new wind and solar
power production equipment. Yet it also reduces the cost of providing
electricity on windy and sunny days. This translates into lower electricity
prices in the wholesale market, as experienced in Germany when wholesale prices
are sometime close to zero and even negative. Cheap electricity is not good for
the climate, specifically because of the back-up necessity: consumers keep on
consuming large quantities of electricity produced from fossil fuel to cope
with intermittency. As long as our energy mix is not totally free of pollution,
we must reduce electricity consumption, which requires higher electricity
prices. By contrast, subsidies push energy prices down, and taxes up. The best
way to both lower demand and produce a greener mix is to price greenhouse gas
emissions from burning fossil fuel.
Cutting greenhouse gas emissions without slowing economic growth down is the
main challenge of the next climate conference. Carbon-free sources of energy
such as wind and solar power are certainly key solutions. We must keep on
investing in renewables, installing windmills and solar panels. But not just by
pouring in subsidies. Pricing greenhouse-gas emissions should be given priority
to avoid the negative side effects of green subsidies on the energy mix.
The objective of the COP21 must be the reduction of greenhouse gas emissions at
the least cost. The emphasis on renewable energy sources is a wasteful
confusion of the means with the ends. We do certainly need innovative
technologies to reduce greenhouse emissions at the lowest cost, but it should
come with the right public policy.