Electricity Interconnection with Intermittent Renewables (PDF)
Electricity interconnection has been recognized as a way to mitigate carbon emissions through dispatching more efficient electricity production and accommodating the growing share of renewables. I analyze the impact of electricity interconnection in the presence of intermittent renewables, such as wind and solar power, on renewable capacity and carbon emissions using a two-country model. I find that in the first-best, interconnection decreases investments in renewable capacity and exacerbates carbon emissions if the social cost of carbon (SCC) is low. Conversely, interconnection increases renewable capacity and reduces carbon emissions for a high SCC. Moreover, the intermittency of renewables generates an insurance gain from interconnection, which also implies that some renewable capacity is optimally curtailed in some states of nature when the SCC is high. The curtailment rate and the corresponding carbon emissions increase for more positively correlated intermittency. I calibrate the model using data from the European Union electricity market and simulate the outcome of expanding interconnection between Germany-Poland and France-Spain. I find that given the current level of SCC, interconnection may increase carbon emissions. The net benefit of interconnection is positive, with uneven distribution across countries.
Public Safety under Imperfect Taxation (with Nicolas Treich) (PDF) R&R Journal of Environmental Economics and Management
An important objective of many publicly-financed environmental projects is to reduce mortality. In this paper, we examine theoretically the effect of tax system imperfections on the optimal public investment in mortality risk reduction (or public safety). We compare three tax systems, namely first-best, uniform tax, and income tax. Moreover, we consider several sources of imperfection, namely individuals’ heterogeneity in wealth and in risk exposure, and labor supply distortion. We show that the effect of imperfect taxation critically depends on the source of imperfection as well as on the individual utility and survival probability functions. We conclude that imperfect taxation cannot generically justify less public safety. There is thus no fundamental reason to always adjust downwards the value of statistical life (VSL) because of imperfect taxation, nor to assume a marginal cost of public funds systematically greater than one for the benefit-cost analysis of environmental projects.
Climate Policy and Electricity Trade (with Stefan Ambec) (PDF)
The lack of coordinated international climate policies raises leakage concerns in the design of energy transition policies. We investigate the optimal unilateral carbon policy design for electricity trade with intermittent renewable energy. We consider policy instruments including carbon tax, border adjustment tax, and renewable subsidies. In turn, we analyze the effect of such policies on market equilibrium prices, renewable investment, and global emissions. Using a two-country model of electricity trade, we characterize the conditions under which different combinations of policy instruments implement the optimal energy mix. We find that with a unilateral carbon tax, the border adjustment tax turns out to be effective only when renewables are producing. Moreover, renewables must be subsidized to be exported, in which case carbon emissions should be taxed more than the Pigouvian level to avoid excessive consumption.