Effects Of Renewable Energy Use In The Energy Mix On Social Welfare

This article examines the effects of energy policy on social welfare under the pseudo-social planner's problem. To assess the social welfare effects, we focus on the energy mix as a policy tool and incorporate two factors into the model: cost-efficiency and climate damage. For model calibration, we use U.S. data of levelized cost of energy, carbon dioxide emission intensity, and carbon dioxide concentration in the atmosphere; thus, the analysis is within the scope of the U.S. energy policy. The results show that a 10% increase in the proportion of renewable energy in the energy mix decreases social welfare by 0.753% in the long run. This negative welfare effect of the increase in renewable energy use occurs because the negative effect of reduced cost-efficiency outweighs the positive effect of less climate damage on social welfare. We also find that increased energy policy uncertainty further reduces social welfare. This is because a higher degree of energy policy uncertainty leads to a greater uncertainty in return on capital, which makes rational agents postpone their investment.(c) 2021 Elsevier B.V. All rights reserved.This article examines the effects of energy policy on social welfare under the pseudo-social planner's problem. To assess the social welfare effects, we focus on the energy mix as a policy tool and incorporate two factors into the model: cost-efficiency and climate damage. For model calibration, we use U.S. data of levelized cost of energy, carbon dioxide emission intensity, and carbon dioxide concentration in the atmosphere; thus, the analysis is within the scope of the U.S. energy policy. The results show that a 10% increase in the proportion of renewable energy in the energy mix decreases social welfare by 0.753% in the long run. This negative welfare effect of the increase in renewable energy use occurs because the negative effect of reduced cost-efficiency outweighs the positive effect of less climate damage on social welfare. We also find that increased energy policy uncertainty further reduces social welfare. This is because a higher degree of energy policy uncertainty leads to a greater uncertainty in return on capital, which makes rational agents postpone their investment.