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How effective are renewable energy subsidies? Maybe not effective as originally thoughts, finds news study

By: Neil Schoenherr |

Renewable energy subsidies have been a politically popular program over the past decade. These subsidies have led to explosive growth in wind power installations across the United States, especially in the Midwest and Texas.

But do these subsidies work?

Not as well as one might think, finds a new study from Washington University in St. Louis’ Olin Business School.

The “social costs” of carbon dioxide would have to be greater than $42 per ton in order for the environmental benefits of wind power to have out weighed the costs of subsidies, finds Joseph Cullen, PhD, assistant professor economics and expert on environmental regulation and energy markets.

The social cost of carbon is the marginal cost to society of emitting one extra ton of carbon (as carbon dioxide) at any point in time.

The current social cost of carbon estimates, released in November and projected for 2015, range from $12 to $116 per ton of additional carbon dioxide emissions. The prior version, from 2010, had a range between $7 and $81 per ton of carbon dioxide. The estimates are expected to rise in the coming decades.

Cullen’s findings are explained in a paper titled “Measuring the Environmental Benefits of Wind-Generated Electricity” in American Economic Journal: Economic Policy.

“Given the lack of a national climate legislation, renewable energy subsidies are likely to be continued to be used as one of the major policy instruments for mitigating carbon dioxide emissions in the near future,” Cullen says. “As such, it’s imperative that we gain a better understanding of the impact of subsidization on emissions.”

Since electricity produced by wind is emission free, the development of wind-power may reduce aggregate pollution by offsetting production from fossil fuel generated electricity production. When low marginal cost wind-generated electricity enters the grid, higher marginal cost fossil fuel generators will reduce their output.

However, emission rates of fossil fuel generators vary greatly by generator (coal-fired, natural gas, nuclear, hydropower). Thus, the quantity of emissions offset by wind power will depend crucially on which generators reduce their output, Cullen says.

The quantity of pollutants offset by wind power depends crucially on which generators reduce production when wind power comes online.

Cullen’s paper introduces an approach to empirically measure the environmental contribution of wind power resulting from these production offsets.

“By exploiting the quasi-experimental variation in wind power production driven by weather fluctuations, it is possible to identify generator specific production offsets due to wind power,” Cullen says.

Importantly, dynamics play a critical role in the estimation procedure, he finds.
“Failing to account for dynamics in generator operations leads to overly optimistic estimates of emission offsets,” Cullen says. “Although a static model would indicate that wind has a significant impact on the operation of coal generators, the results from a dynamic model show that wind power only crowds out electricity production fueled by natural gas.”

The model was used to estimate wind power offsets for generators on the Texas electricity grid. The results showed that one mega watt hour of wind power production offsets less than half a ton of carbon dioxide, almost one pound of nitrogen oxide, and no discernible amount of sulfur dioxide.

“As a benchmark for the economic benefits of renewable subsidies, I compared the value of offset emissions to the cost of subsidizing wind farms for a range of possible emission values,” Cullen says. “I found that the value of subsidizing wind power is driven primarily by carbon dioxide offsets, but that the social costs of carbon dioxide would have to be greater than $42 per ton in order for the environmental benefits of wind power to have out weighed the costs of subsidies.”