OverviewGrowing concerns about climate change have led to a strong promotion of renewable energy. The European Union,for example, is committed to reach a 20% share for renewables in final energy consumption in 2020. To achieve this,the European Council has adopted mandatory differentiated national targets for each of the member states. Since thecapacity to realize renewables strongly differs among countries, it can be expected that substantial gains may arisefrom international cooperation. This already has been assessed in the literature, with cost savings estimates rangingfrom 10% up to 37%. A potential system that has been proposed to fully exploit the benefits of a cost-effectivedistribution of renewable energy production is an EU-wide green certificate system. Such a system allows countriesto lower their overall costs of meeting the targets by importing foreign certificates instead of realizing their domestictarget within their national electricity market. In this paper, we model the impact of international tradable greencertificates (TGC) between two countries. Special attention is devoted to the distributional effects. The contributionto the literature is twofold. First, we look at the optimal location of renewable energy resources (referred to hereafteras green production). In the literature, it is often argued that the optimal location involves equating marginal greenproduction costs in all countries. This statement, however, hinges on the assumption that marginal black (non-green)production costs are equal in all countries (e.g., due to unlimited transmission capacity). We show that, when thisassumption does not hold, the optimal renewable location may lead to differing marginal green production costsbetween countries. Second, a partial-equilibrium model is created to assess the production and distributional effectsaccompanying the introduction of international TGC trade. The literature already contains some work related to thissubject. E.g., Amundsen & Nese [1] describe the distributional effects of changing green quota obligations when aninternational market for green certificates already exists. Other (mostly simulation-based) studies compare thesituation before and after the introduction of an international green certificate market. These studies generallyconclude that global welfare can be substantially improved, but also that strong distributional effects are likely toarise. To the authors’ knowledge, however, no study comprehensively presents the distributional effects of allinvolved agents accompanying the introduction of TGC trade. This paper aims to address this gap.MethodsThe results are obtained by developing a partial-equilibrium model. The model contains two countries that each havean electricity sector where black and green technologies are used to satisfy the local electricity demand. Moreover,we consider both congested and uncongested electricity trade between both countries. Both countries face aminimum green production constraint expressed as a share of total electricity consumption. Although we onlyconsider two countries, we assume that these act non-strategically and so, we make the implicit assumption that manycountries are participating. These assumptions, combined with the necessary convexity assumptions for the black andgreen cost functions allow to decentralize any welfare optimum via a system of competitive electricity and certificatemarkets. The model is used to look for a welfare optimum under three regimes for trade in green certificates: notrade, unlimited trade and limited trade.ResultsFirst, we show that it is generally not optimal to equate marginal green production costs among countries. Instead,the optimal solution involves equalizing the difference between marginal green and black production costs amongcountries. In the literature, it often is assumed that the cost per additional unit of renewable generation only includesthe green production costs. This assumption is only justified if there is unlimited trade in electricity. We show that,when this assumption does not hold, the savings from displaced black production play an important role as well.Countries with high marginal black production costs should thus employ high shares of renewable production wheninterconnection capacity is limiting, even if those countries are not that well-endowed in green production.Second, we show the effects of opening an international TGC market on the different agents. We distinguish betweenthe certificate-exporting and certificate-importing country. The certificate-exporting country is obligated to generatesufficient green power to cover its certificate exports on top of its own quota obligation. In turn, the certificateimportingcountry’s quota obligation is relaxed by the amount of certificate imports.The intra-country redistribution effects are fairly intuitive, but depend on the transmission situation (congested oruncongested). In the certificate-exporting (importing) country, green production will always expend (decrease)relative to the situation without international certificate trade. Furthermore, the effect on consumers and blackproducers in the certificate-exporting (importing) country may be both negative (positive) as indeterminate,depending on the transmission situation.The inter-country redistribution effects comprise two effects. First, as argued in the literature, it can indeed be shownthat both countries gain in the certificate market. Second, the introduction of certificate trade also impacts theelectricity market, which leads to a welfare transfer between both countries if these are engaged in electricity trade.More specifically, the introduction of a common TGC market can affect the average electricity price (both positivelyand negatively). A decrease of the average electricity price benefits the electricity-importing country at the expenseof the electricity-exporting country (and vice versa), representing a welfare transfer in the electricity market. Theaggregate of these two welfare components remains indeterminate, implying that one of the countries may becomeworse off after implementing a common TGC market. Nevertheless, both countries always gain collectively.ConclusionsThe model showed that it generally is not optimal to equate marginal green production costs among collaboratingcountries. Instead, the difference between marginal green and black production costs among countries should beequal. This result is highly relevant for the design of collaboration schemes. A common green certificate market (or acommon feed-in premium), for example, would theoretically accomplish this goal. Collaboration schemes purelybased on renewable production costs (e.g., common fixed feed-in tariffs), however, likely cause distortions as theyneglect black marginal production costs.The distributional welfare effects accompanying the introduction of a common TGC market are quite pronounced.First, intra-country redistribution effects may impose political barriers for implementing renewable collaborationsystems. Similarly, the inter-country redistribution effects may impose economic barriers. In other words, countriesmay have incentives to limit certificate trade below the global optimal.This remains a simple model with two important restrictions: (ⅰ) the model is highly aggregated and based onextremely simplifying assumptions, (ⅱ) green production is an objective as such. A more complex model mayincrease the temporal or technological resolution and endogenize the benefits of green production under the form ofcheaper future electricity production (learning by doing) or under the form of other environmental benefits thancarbon emission reduction.
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