The Green Market Transition
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The Green Market Transition

Carbon Taxes, Energy Subsidies and Smart Instrument Mixes

Edited by Stefan E. Weishaar, Larry Kreiser, Janet E. Milne, Hope Ashiabor and Michael Mehling

The Paris Agreement’s key objective is the strengthening of the global response to climate change by transitioning the world to an increasingly green economy. In this book, environmental tax and climate law experts examine carbon taxes energy subsidies, and support schemes for carbon and energy policies. Chapters reflect on the underlying policy dynamics and the constraints of various fiscal measures, and consider the harmonisation of smart instrument mixes.
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Chapter 7: Renewable energy deployment at the interplay between support policies and fossil fuel subsidies

Martina Zahno and Paula Castro

Abstract

This chapter aims to provide empirical evidence that fossil fuel subsidies present a considerable barrier to the deployment of renewable energy, even in the presence of policies that also subsidize or otherwise support renewables. The empirical relationship is analysed using the example of electricity, by modelling the determinants of electricity generation from non-hydro renewable energy sources, using a large cross-country dataset covering the time period from 2003 to 2013. As non-hydro renewables participation has been zero in many (low-income) countries until very recently, we estimate two-part models. This involves panel binary regressions in the first part to model the probability that a positive amount of electricity from renewables is produced. In the second part, we apply linear panel models to estimate the expected share of renewables, given that it is positive. We found that the likelihood that a country produces any electricity from renewables at all is positively related to the existence of policies that support renewables deployment, but does not seem to be related to fossil fuel subsidies. In cases where countries already produce grid-based electricity from renewable sources, we find significant evidence between-country effects for fossil fuel subsidies and financial support policies. Hence there are indications that the contribution of non-conventional renewables to electricity generation is negatively related to higher than average per capita levels of fossil fuel subsidies but despite this, financial support policies do make a positive difference in cross-country comparisons of renewable electricity shares.

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