Treich, N. & Yang, Y. (2021) Public safety under imperfect taxation. Journal of Environmental Economics and Management 106,102421. https://doi.org/10.1016/j.jeem.2021.102421
Electricity Interconnection with Intermittent Renewables
Electricity interconnection has been recognized as a way to mitigate carbon emissions by 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 Pigouvian carbon price is low. Conversely, interconnection increases renewable capacity and reduces carbon emissions for a high carbon price. 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 carbon price 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 carbon tax, the interconnection may increase carbon emissions.
Climate Policy and Electricity Trade (with Stefan Ambec)
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.