Affiliation:
1. Norwegian University of Science and Technology
2. Massachusetts Institute of Technology
3. University of Maryland, College Park
4. Aalto University
Abstract
Analyses of climate policies often assume the economy is in a first-best equilibrium with well-functioning markets. This paper studies policy effects in power systems characterized by a market failure known as the missing market problem, whereby the incompleteness of long-term markets leaves investors exposed to uninsured risk. We find that renewable tax credits and CO 2 taxes may partly correct this market failure, thus providing an economic benefit additional to climate change mitigation. Consequently, illustrative experiments show the costs of these policies to be lower, and in some cases even negative, in power systems with missing risk markets.
Publisher
Network Design Lab - Transport Findings
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