dτ <0, dQRE dτ <0, dυ dτ >0, dQR dτ <0. Proof. See AppendixC.6.2.
If the government targets the RE share instead of a fixed pollution level, as expected, a higher domestic import tariff always increases the
3.4 q ua n t i tat i v e e n v i r o n m e n ta l ta r g e t s 117
domestic equipment price, dampens RE equipment installation and thereby dampens renewable electricity generation. Consequently, a higher trade barrier increases the optimal shadow price of pollution. However, interestingly and surprisingly, a higher domestic trade bar- rier reduces the fossil-fuel-generated electricity as well. The intuition is that higher domestic trade protection makes RE equipment more expensive. More costly renewable electricity generation increase the difficulty of meeting the RE share target, which is reflected by a higher common factor of marginal abatement cost υ for both types
of electricity induced by a higher import tariff. To achieve the target, reducing conventional electricity becomes more efficient relative to increasing the renewable electricity generation at the margin.
3.4.2.2 Decentralisation by tradable green certificates
Fossil-fuel-based electricity producerihas to buy green certificates of the amountzi to meet the renewable energy share target:
zi
qiFE+zi ≥α.
So firmifaces the following optimisation problem: Li = PE(QE)qiFE−CiFE qiFE −ρzi+υi h (1−α)zi−αqiFE i , where ρ is the market price for tradable green certificates, and υi is
the Lagrange multiplier w.r.t. the renewable energy share target. The renewable electricity producer j’ profit is:
πREj qjR= PE(QE)εj qjR+ρzj−PRqjR = [PE(QE) +ρ]εj qjR−PRqRj,
where the second equality is because the number of green certificates created by renewable electricity producer jequals to its output: zj = εj
qjR.
First-order conditions for fossil-fuel-based electricity producers: Liqi FE =PE− CiFE0qiFE−υiα=0, Lizi =−ρ+υi(1−α) =0. (3.24)
Thus, all fossil-fuel-based electricity producers have the same mar- ginal abatement costs (shadow cost of meeting the quota): υi = υk =
ρ
1−α.
First-order conditions for renewable electricity producers:
πREqj j R
= [PE(QE) +ρ]εj0
The equilibrium is determined by: PE− CiFE0qiFE−ρ α 1−α =0, [PE(QE) +ρ]εj0 qjR−PR =0, J
∑
j=1 εj qjR= I∑
i=1 zi.From (3.24), the second-best price of tradable green certificates isρ∗ =
υ∗(1−α). Thus, the import tariff increases the second-best price of
tradable green certificates: dρ∗
dτ = (1−α)
dυ∗
dτ >0.
3.4.2.3 Decentralisation by a budget balanced premium system or a budget
balanced FIT
We denote ξ and t as the premium and mark-up on the fossil-fuel-
based electricity producers’ cost respectively. The fossil-fuel-based electricity produceri’s profit is:
πiFE
qiFE= [PE(QE)−t]qiFE−CiFE
qiFE,
First-order condition for profit maximisation of fossil-fuel-based elec- tricity producer iis:
πiFEqi
FE = PE(QE)−t−
CiFE0qiFE=0. The renewable electricity producer j’s profit is:
πREj
qjR= [PE(QE) +ξ]εj
qjR−PRqjR.
First-order condition for profit maximisation of renewable electricity producerjis: πREqj j R = [PE(QE) +ξ]εj0 qRj−PR =0.
The second-best emission tax and FIT premium are t∗ = υ∗α and ξ∗ =υ∗(1−α)respectively. A balanced budget requires:
t I
∑
i=1 qiFE= ξ J∑
j=1 εj0 qRj ⇔υ∗α I∑
i=1 qiFE= υ∗(1−α) J∑
j=1 εj0 qjR ⇔ J ∑ j=1 εj qjR I ∑ i=1 qiFE+ J ∑ j=1 εj qjR = α.3.5 c o n c l u s i o n 119
Under certainty, given that t∗ = υ∗α and ξ∗ = υ∗(1−α), and equi-
librium electricity price PE∗, the equivalent second best FIT is ς∗ =
PE∗+ξ∗. Thus, the domestic import tariff increases the second-best
emission tax, budget-balanced FIT premium and budget-balanced FIT: dt∗ dτ =α dυ∗ dτ >0, dξ∗ dτ = (1−α) dυ∗ dτ >0, dς dτ = dPE ∗ dτ + (1−α)dυ ∗ dτ >0. 3.5 c o n c l u s i o n
Multiple trade and environmental policies in the renewable energy sector are commonly observed in many countries and regions. Reg- ulators often face various practical constraints and have some partic- ular market or non-market targets. This chapter provides analytical analysis of some other environmental policies that are commonly ad- opted in the renewable energy equipment sector in different countries and regions at present. We initially assess their welfare and envir- onmental impacts, based on our stress on how these policies inter- act with a Northern feed-in tariff (FIT) premium and/or a Northern import tariff studied in Chapter 1. By exploring a wider choice of policy tools, we are able to provide a more comprehensive as well as deeper understanding of the welfare and environmental effects of trade and environmental policies in the context of North–South trade in RE equipment.
Our first attempt at incorporating a Southern research and devel- opment (R&D) subsidy allows us to derive some novel insights, due to strategic interactions at both the firm and government levels in this bilateral policy setting. The Cournot duopolistic imperfect com- petition is central to the policy game. One of our main conclusions is that a lower trade barrier unsurprisingly induces a higher foreign process R&D subsidy, which reduces the foreign production cost of RE equipment. This finding offers a preliminary answer to the ques- tion of assessing the impact of trade liberalisation in environmental goods on R&D incentives (Nimubona, 2012, p. 339). Conversely, a higher Southern R&D subsidy indeed leads to a higher Northern import tariff, which is consistent with the recent anti-dumping and countervailing duty imposed by developed countries against newly industrialised countries. We also identify that the Southern R&D subsidy under a non-cooperative strategy is surprisingly more than that under a cooperative strategy in the case of a Cournot duopoly, but unsurprisingly less than the latter in the case of Southern mono- poly. Consequently, taking Northern policies as given, there is too little environmental protection in the monopoly case but too much
environmental protection in the duopoly case. This finding contrasts with the existing literature which generally argues for the existence of under-subsidisation of environmental goods when both pollution and imperfect competition externalities are present, which both lead to under-supply of environmental goods.
Our next assessment of a Northern output (or production) sub- sidy demonstrates its ambiguous relationship with a domestic FIT premium, and its guaranteed substitutability with a domestic import tariff when there is no environmental harm. Higher environmental harm increases the possibility of substitutability of the former am- biguous relationship, but counteracts rather than necessitates the lat- ter substitutability. The former relationship is particularly relevant for a country with overlapping upstream and downstream environ- mental policies, to promote the RE equipment sector.
Our final investigation sheds light on the welfare and environ- mental impacts of trade protection in the presence of a binding non-market environmental target rather than the previously uncon- strained welfare maximisation. As a first step, we limit our atten- tion to the case in which the domestic country fully relies on for- eign RE equipment imports. We find that trade protection against foreign RE equipment imports leaves emissions unchanged as expec- ted, but surprisingly reduces emissions when an RE share target is in place instead. The latter result is because when an import tariff leads to more expensive RE equipment deployment, so at the margin, reducing conventional electricity becomes more efficient relative to increasing the renewable electricity generation. As far as we know, despite its elementary nature, this assessment is one of the seminal works that theoretically examines the interaction between domestic trade policy and quantitative environmental targets. We also provide implications if the electricity market is decentralised. For example, a higher trade barrier results in higher optimal emissions taxes or more expensive optimal tradable permits. The reason is that when renewable electricity generation is more costly, due to a higher im- port tariff, polluting conventional electricity becomes relatively more competitive and its output would rise if emissions are still priced at the initial level. Hence, a higher emissions price has to be imposed so as to keep emissions below the targeted level.
Overall, this chapter can at least provide some preliminary policy recommendations for national and global regulators who try to design better single or multiple RE policies. We also hope to facilitate the work of industry decision makers in the RE equipment sector and renewable electricity suppliers alike, to assist them to make better and more informed investment decisions with a further understanding of policy interactions and their effects.
The major limitation of this chapter is that we rely on comparative statics analysis with a specific functional form (quadratic) of renew-
3.5 c o n c l u s i o n 121
able electricity generation. Therefore, in the next stage, we would like to undertake a standard comparative statics analysis as we did in Chapter 1, so as to study the net environmental impacts of these alternative policies. In the future, it would be interesting to explore innovation in RE equipment sector in more detail, such as model- ling R&D spillovers, the demand-creating product R&D as well as learning-by-doing and economies of scale. Another direction is to ex- amine the net effect of trade protection on an endogenous emissions target. On the one hand, according to this chapter, a higher import tariff makes the target harder to meet, so it is likely to result in a less ambitious emissions target. On the other hand, if the emissions target is endogenously set to be increasing in the domestic welfare or GDP (i.e. an intensity emissions target, see e.g., Jotzo and Pezzey,
2007; de Vries et al., 2014 for details), since the domestic welfare is hump-shaped in the domestic import tariff, it is likely that we will see an additional non-monotonic effect of the import tariff on the en- dogenous emissions target via its non-monotonic welfare effect. We also plan to verify whether the interaction between trade policies and quantitative environmental targets respond differently to some altern- ative market structures, such as an international oligopoly. Empirical testing is another important future research direction.