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Feed-in-Tariffs for Electricity from Renewable Resource Energy to Move Down the Learning Curve

PFM, Vol. 10 No. 2, (2010)

We develop a model with two types of electricity producers, fossil fuel utilities generating emissions, and suppliers of electricity from of renewable energy sources (RES-E). We account for the ver-tical structure of the renewable energy sector by considering up-stream RES-E equipment producers engaged in learning-by-doing and selling their equipment to downstream operators. We show that under pure private learning a first-best allocation can be in-duced by charging emission taxes on the Pigouvian level only, while in the case of learning spillovers additional subsidies on both output and market entry are necessary. In case that (optimal) emis-sion taxes are ruled out, then in case of purely private learning, second-best optimal feed-in-tariffs should only account for the marginal environmental damage and the marginal cost of produc-tion of the conventional utilities. In the case of learning spillovers, feed-in-tariffs can also be used to spur learning.

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