Friday, October 28, 2016

Cost-Effectiveness and Incidence of Renewable Energy Promotion in Germany

Over the last decade Germany has boosted renewable energy in power production by means of passive subsidies. The flip side are very high electricity prices which raises concerns that the transition cost towards a renewable energy system will be mainly borne by poor households. In this paper, we combine computable general equilibrium and microsimulation analysis to investigate the cost-effectiveness and incidence of Germany’s renewable energy promotion. We find that the regressive effects of renewable energy promotion could be attenuated by alternative subsidy financing mechanisms which achieve the same level of electricity generation from renewable energy sources.
We have coupled a microsimulation model that employs the Almost Ideal Demand System (aids) for representing household demand with a computable general equilibrium (CGE) model to investigate the cost-effectiveness and incidence of renewable energy promotion policies in Germany.

Our simulation analysis indicates substantial scope for improving on the cost-effectiveness of Germany’s policy regulation. While phasing out exemptions from the reallocation charge (RAC) would reduce the economy-wide costs of the German EEG by around 5 percent, replacing the RAC by increased value-added taxes would cut the EEG’s efficiency cost by more than two thirds. Making the fit uniform across promoted technologies, surprisingly, does not have the expected beneficial effects in the context of a RAC. This is due to increasing inefficiency of rising rac rates under such scenarios.

From a distributional perspective, replacing the RAC by higher value added taxes also turns out to be attractive since the poorest households benefit. The Atkinson index (a measure of social welfare that includes inequality across the nation) also points to a vat based subsidy financing as the most favourable policy design among those investigated in this paper.

by Christoph Boehringer 1, Florian Landis 2 and Miguel Angel Tovar Reaños
1. University of Oldenburg
2. Centre for European Economic Research (ZEW)
ZenTra Working Paper in Transnational Studies No. 66/2016; September 2016
Keywords: renewable energy policy, feed-in tariffs, CGE, microsimulation
via SSRN:

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