UCLA Economics 134 L16 Renewable Energy Lecture PDF

Economics 134 L16. Renewable energy Will Rafey UCLA December 4, 2023 Will Rafey (UCLA) Econ 134 L16 December 4, 2023 1 / 24 Announcements 1. Course evaluation! “Please ask your students to log into MyUCL...

Economics 134 L16. Renewable energy Will Rafey UCLA December 4, 2023 Will Rafey (UCLA) Econ 134 L16 December 4, 2023 1 / 24 Announcements 1. Course evaluation! “Please ask your students to log into MyUCLA to complete the evaluations, as instructor encouragement is one of the best ways to ensure a high response rate.” 2. Extended office hours, 5–7.30pm this Wednesday 3. Final exam: Sunday, 12/8, 3:00–6:00pm Perloff 1102 (last name starting with A–G) Dodd 121 (last name starting with H–P) Haines 220 (last name starting with Q–Z) Will Rafey (UCLA) Econ 134 L16 December 4, 2023 1 / 24 Clean technology Innovation: renewable energy (today) electric vehicles (L18) Will Rafey (UCLA) Econ 134 L16 December 4, 2023 2 / 24 Two externalities Broadly, two reasons for subsidizing renewable energy: 1 negative externalities with fossil fuel production (air pollution, climate change) 2 positive externalities in innovation Related, but distinct. Will Rafey (UCLA) Econ 134 L16 December 4, 2023 3 / 24  Solar energy Solar energy 2010–20: the decade of solar Government support Cost declines Environmental externalities Optimal clean energy policy Transition to clean technology Will Rafey (UCLA) Econ 134 L16 December 4, 2023 3 / 24  Solar energy 2010–20: the decade of solar The rise of solar Three stylized facts from 2005–20: 1 Immense increase in solar energy installation 2 Substantial increase in government support 3 Tremendous cost declines Will Rafey (UCLA) Econ 134 L16 December 4, 2023 4 / 24  Solar energy 2010–20: the decade of solar The rise of solar (levels) Will Rafey (UCLA) Econ 134 L16 December 4, 2023 5 / 24  Solar energy 2010–20: the decade of solar The rise of solar (logs) Will Rafey (UCLA) Econ 134 L16 December 4, 2023 6 / 24  Solar energy 2010–20: the decade of solar The rise of solar (%) Will Rafey (UCLA) Econ 134 L16 December 4, 2023 7 / 24  Solar energy Government support 1. Renewable energy incentives in the U.S. Two key sources: state mandates — “renewable portfolio standards” 29 states e.g., policy passed in 2005 specifying 20% renewable electricity by 2020 often implemented as a cap-and-trade (via tradeable “renewable energy credits”) federal subsidies — mainly production, investment tax credits approx $51 billion from 2005–15 Inflation Reduction Act of 2022: maybe $320b over 2022–30 (Bistline, Mehrotra, Wolfram 2023 NBER WP) Will Rafey (UCLA) Econ 134 L16 December 4, 2023 8 / 24  Solar energy Government support States with renewable portfolio standards Will Rafey (UCLA) Econ 134 L16 December 4, 2023 9 / 24  Solar energy Government support California’s renewable portfolio standard Will Rafey (UCLA) Econ 134 L16 December 4, 2023 10 / 24  Solar energy Government support California’s renewable portfolio standard Will Rafey (UCLA) Econ 134 L16 December 4, 2023 10 / 24  Solar energy Government support California’s renewable portfolio standard Will Rafey (UCLA) Econ 134 L16 December 4, 2023 10 / 24  Solar energy Government support California’s renewable portfolio standard Will Rafey (UCLA) Econ 134 L16 December 4, 2023 10 / 24  Solar energy Government support Federal subsidies Source. Kirshenberg et al. 2018, p. ES-4. Will Rafey (UCLA) Econ 134 L16 December 4, 2023 11 / 24  Solar energy Cost declines 2. Cost declines Will Rafey (UCLA) Econ 134 L16 December 4, 2023 12 / 24  Solar energy Cost declines Cost declines Will Rafey (UCLA) Econ 134 L16 December 4, 2023 13 / 24  Solar energy Cost declines Cost declines Will Rafey (UCLA) Econ 134 L16 December 4, 2023 13 / 24  Solar energy Cost declines Cost declines Will Rafey (UCLA) Econ 134 L16 December 4, 2023 14 / 24  Solar energy Cost declines Cost declines Will Rafey (UCLA) Econ 134 L16 December 4, 2023 14 / 24  Solar energy Cost declines Cost declines Will Rafey (UCLA) Econ 134 L16 December 4, 2023 14 / 24  Solar energy Cost declines Cost declines Will Rafey (UCLA) Econ 134 L16 December 4, 2023 14 / 24  Solar energy Cost declines Discussion Appears to be significant declines in cost. 1. As always, correlation 6= causation: many confounding variables (e.g., silicon price decline) the past may not guide the future 2. Channel unclear: economies of scale v. learning-by-doing economies of scale—likely internalized by the firm learning-by-doing—maybe internalized by firm, but could create spillovers (externalities) across firms ,→ very different policy implications, as we will see Will Rafey (UCLA) Econ 134 L16 December 4, 2023 15 / 24  Solar energy Environmental externalities 3. Externalities Renewable energy does not generate carbon emissions Complicated by two factors: 1 taxing/subsidizing energy, in general, may affect aggregate energy demand (“rebound” effect) subsidy (e.g., tax credit) should increase demand mandate (e.g., RPS) should decrease demand 2 avoided carbon emissions depend on the counterfactual electricity generation source ,→ Will Rafey (UCLA) Econ 134 L16 December 4, 2023 16 / 24  Solar energy Environmental externalities Regional variation in displaced emissions, U.S. Source. Callaway, Fowlie, and McCormick 2018, p. 57. Will Rafey (UCLA) Econ 134 L16 December 4, 2023 17 / 24  Solar energy Environmental externalities Regional variation in displaced emissions, U.S. Source. Callaway, Fowlie, and McCormick 2018, p. 57. Will Rafey (UCLA) Econ 134 L16 December 4, 2023 17 / 24  Solar energy Environmental externalities Regional variation in displaced emissions, U.S. Source. Callaway, Fowlie, and McCormick 2018, p. 57. Will Rafey (UCLA) Econ 134 L16 December 4, 2023 17 / 24  Solar energy Environmental externalities Detour: Germany What did Germany displace with all of its solar? Will Rafey (UCLA) Econ 134 L16 December 4, 2023 18 / 24  Solar energy Environmental externalities Detour: Germany Will Rafey (UCLA) Econ 134 L16 December 4, 2023 18 / 24  Solar energy Environmental externalities Detour: Germany Will Rafey (UCLA) Econ 134 L16 December 4, 2023 18 / 24  Solar energy Environmental externalities Detour: Germany Will Rafey (UCLA) Econ 134 L16 December 4, 2023 18 / 24  Solar energy Environmental externalities Will Rafey (UCLA) Econ 134 L16 December 4, 2023 18 / 24  Optimal clean energy policy Solar energy 2010–20: the decade of solar Government support Cost declines Environmental externalities Optimal clean energy policy Transition to clean technology Will Rafey (UCLA) Econ 134 L16 December 4, 2023 18 / 24  Optimal clean energy policy Clean technology Suppose there are two types of technologies: dirty, which produces an externality in proportion to inputs, kd clean, which produces no externality Both types have a production function f (k), and incur k in input costs. Dirty firm. Profits for the dirty firm, given a tax τ on the externality, are given by f (kd ) − kd − τ kd. Let kd∗ (τ ) solve f 0 (kd∗ ) = 1 + τ (maximize profits). Then πd∗ (τ ) = f (kd∗ ) − kd∗ − τ kd∗ are the dirty firm’s equilibrium profits for a given tax τ. Will Rafey (UCLA) Econ 134 L16 December 4, 2023 19 / 24  Optimal clean energy policy Transition to clean technology Clean technology Clean firm. Profits for the clean firm are independent of the tax, but may involve some subsidy S > 0. They are given by πc∗ (S) = f (kc ) − kc + S Transition to clean technology. Suppose that all firms are initially dirty, but each firm can switch to clean for a fixed adoption cost C > 0. Denote the fraction of clean firms by q ∈ [0, 1]. Equilibrium clean technology adoption. For some interior q ∈ (0, 1), firms must be indifferent between clean or dirty: πc∗ (S) − πd∗ (τ ) − C = 0. Will Rafey (UCLA) Econ 134 L16 December 4, 2023 20 / 24  Optimal clean energy policy Transition to clean technology Clean technology: Optimal policy Case I. Optimal tax. What is the first-best level of kd ? Welfare is W = q [f (kc ) − kc ] + (1 − q) [f (kd ) − kd ] − D((1 − q)kd ) − qC | {z } | {z } |{z} net output damages cost Maximize W via ∂W 0= = (1 − q)(f 0 (kd ) − 1) − (1 − q)D 0 (·) ∂kd and, dividing by 1 − q, we obtain f 0 (kdFB ) − 1 − D 0 (·) = 0. This implies that we can attain the first-best level, kdFB , by imposing a tax τ equal to the marginal damage! Will Rafey (UCLA) Econ 134 L16 December 4, 2023 21 / 24  Optimal clean energy policy Transition to clean technology Clean technology: Optimal policy What is the first-best level of clean technology, q FB ? Again, maximize W , to obtain ∂W 0= = f (kc ) − kc − [f (kd ) − kd ] + kd D 0 () − C ∂q Note that, if D 0 (·) = τ , this gives the condition for efficient adoption as f (kc ) − kc − ([f (kd ) − kd ] − kd D 0 ()) − C = 0. | {z } | {z } πc∗ (0) πd∗ (τ ) But πc∗ (0) − πd∗ (τ ) − C = 0 (?) is exactly the condition for equilibrium adoption of clean technology! No need for subsidy. Will Rafey (UCLA) Econ 134 L16 December 4, 2023 22 / 24  Optimal clean energy policy Transition to clean technology Clean technology: Subsidies only Case II. Subsidies only. Suppose instead that we cannot directly regulate dirty production, so that τ = 0. Should we subsidize clean technology? Yes. X We can attain the efficient level of clean technology with a subsidy of S = kd D 0 (·), but this will not reduce carbon emissions from the firms that remain dirty. Clean technology subsidy without regulating existing dirty production is a second-best policy solution to the externality. better than nothing worse than the optimal tax Remark. The case of a clean technology mandate is identical. Will Rafey (UCLA) Econ 134 L16 December 4, 2023 23 / 24  Optimal clean energy policy Transition to clean technology Next time Last lecture—we’ll finish our analysis of optimal clean tech policy + discuss electric vehicles! Will Rafey (UCLA) Econ 134 L16 December 4, 2023 24 / 24