A Cleaner Energy System: Renewable Energy and Electricity Market Design

Abstract

The rapid growth rates for renewable energy are part of a larger policy agenda to promote a cleaner energy system. The health and environmental impacts of emissions from traditional fossil fuel technologies provide a substantial reason for changing the energy system. For the greatest part, these emission impacts are externalities that provide a justification for policy to supplement natural market forces. The idealized example of a tax on harmful emissions provides a benchmark for comparing the efficacy of various policies. The author questions the policy approach that has been chosen around the globe to reduce emission impacts and externalities by forcing renewable technologies through mandates or subsidies. The author warns that solar levelized costs for 2019 entry would be 90% more expensive in the United States than an advanced gas combined cycle plant, even with emission taxes. The author favors, instead, a better market design, through an emission tax, that would work through the market to affect production, consumption, and investment. He claims such a tax would better stimulate technological innovation in economic renewable supply and in demand-side alternatives.