Figures ...................................................... XIII
Tables ........................................................ XIV
Abbreviations .................................................. XV
1 Introduction ................................................. 1
1.1 Policy Choices for Pollution Control: Policy Mix or
Policy Mess? ............................................ 1
1.2 Climate Change as a Major Problem of Pollution
Control ................................................. 3
1.3 Importance of the German Case Study ..................... 6
1.4 Research Objectives ..................................... 7
1.5 Procedure and Structure ................................ 10
2 Climate Policies in the German Electricity Sector ........... 15
2.1 Introduction ........................................... 15
2.2 International and National Background of German
Climate Policies ....................................... 15
2.2.1 International Climate Strategy .................. 15
2.2.2 European Climate Strategy ....................... 18
2.2.3 German Climate Strategy ......................... 21
2.3 Presentation of German Climate Policies ................ 22
2.3.1 EU Emissions Trading Scheme ..................... 22
2.3.2 Feed-in Tariff for Electricity Generation from
Renewable Energy Sources ........................ 29
2.3.3 Electricity Tax ................................. 35
2.3.4 Bonus for Combined Heat and Power Generation .... 38
2.3.5 Low-Interest Loans Promoting Technology
Innovation and Diffusion ........................ 42
2.3.5.1 Environmental Innovation Programme ..... 42
2.3.5.2 Environment and Energy Efficiency
Programme .............................. 43
2.3.5.3 KfW Programme Renewable Energies ....... 45
2.3.6 Eco-Design Standards ............................ 46
2.3.7 Energy Labelling for Household Appliances ....... 48
2.3.8 Voluntary Agreement ............................. 51
2.4 Summary of the Main Characteristics of the German
Policy Mix ............................................. 53
3 Rationales for Using a Policy Mix for Pollution Control ..... 57
3.1 Introduction ........................................... 57
3.2 Analytical Framework ................................... 59
3.2.1 Efficiency Criterion ............................ 59
3.2.2 Neoclassical Rationale for Using Regulation ..... 60
3.2.2.1 Market Failures ........................ 61
3.2.2.2 Policy Recommendations and
Restrictions ........................... 64
3.2.3 Coase's Rationale for Using Regulation .......... 67
3.2.4 Rationales for Using a Policy Mix ............... 70
3.2.4.1 Multiple Failures of Private
Governance Structures .................. 70
3.2.4.2 High Transaction Costs of Regulation
with Single First-Best Policies ........ 72
3.3 Using a Policy Mix to Cope with Multiple Failures of
Private Governance Structures .......................... 73
3.3.1 Pollution Externalities and Technological
Spillovers ...................................... 74
3.3.1.1 Inefficiency of Single Policies ........ 74
3.3.1.2 Superiority of a Policy Mix ............ 75
3.3.2 Pollution Externalities and Asymmetric
Information ..................................... 77
3.3.2.1 Inefficiency of Single Policies ........ 77
3.3.2.2 Superiority of a Policy Mix ............ 78
3.4 Using a Policy Mix to Cope with High Transaction
Costs of First-Best Single Policies .................... 80
3.4.1 Heterogeneity of Marginal Pollution Damages ..... 81
3.4.1.1 Inefficiency of Single Policies ........ 81
3.4.1.2 Superiority of a Policy Mix ............ 83
3.4.2 Heterogeneity of Marginal Pollution Abatement
Costs ........................................... 85
3.4.2.1 Inefficiency of Single Policies ........ 85
3.4.2.2 Superiority of a Policy Mix ............ 87
3.4.3 Non-Compliance by Polluters ..................... 89
3.4.3.1 Inefficiency of Single Policies ........ 89
3.4.3.2 Superiority of a Policy Mix ............ 92
3.5 Summary and Avenues for Further Research ............... 96
4 Emissions Trading and Feed-in Tariffs for Renewable
Electricity Generation ..................................... 101
4.1 Introduction .......................................... 101
4.2 Applicability of Existing Theoretical Insight ......... 102
4.2.1 Applicability of Rationales for Using
a Policy Mix ................................... 103
4.2.1.1 Learning with Renewable Energy
Technologies .......................... 103
4.2.1.2 Learning Spillovers with Renewable
Energy Technologies ................... 108
4.2.2 Applicability of the Policy Mix Design ......... 110
4.3 Model ................................................. 114
4.3.1 Model Assumptions .............................. 114
4.3.2 The Social Optimum ............................. 117
4.3.3 Emissions Price and Output Subsidy:
The Optimal Policy Mix ......................... 118
4.3.4 Emissions Price and Feed-in Tariff ............. 121
4.4 Summary, Discussion and Restrictions of Model
Results ............................................... 125
5 Emissions Trading and Taxes on Emissions and Output ........ 129
5.1 Introduction .......................................... 129
5.2 Applicability of Existing Theoretical Insight ......... 130
5.3 Model with Emissions Not Depending on Output .......... 135
5.3.1 Model Assumptions .............................. 136
5.3.2 The Social Optimum ............................. 137
5.3.3 Single Policies ................................ 138
5.3.3.1 Emissions Trading ..................... 138
5.3.3.2 Emissions Tax ......................... 140
5.3.4 Policy Mix A: Emissions Trading and
Homogeneous Taxation of Emissions .............. 144
5.3.4.1 Firms' Choices ........................ 144
5.3.4.2 The Policy Mix Compared with
Emissions Trading ..................... 144
5.3.4.3 The Policy Mix Compared with an
Emissions Tax ......................... 147
5.3.5 Policy Mix B: Emissions Trading and
Heterogeneous Taxation of Emissions ............ 148
5.3.5.1 Firms' Choices ........................ 148
5.3.5.2 The Policy Mix Compared with
Emissions Trading ..................... 149
5.3.5.3 The Policy Mix Compared with an
Emissions Tax ......................... 154
5.3.5.4 Overcoming Inefficiencies in
the Policy Mix ........................ 158
5.4 Model with Emissions Depending on Output .............. 163
5.4.1 Model Assumptions .............................. 164
5.4.2 The Social Optimum ............................. 165
5.4.3 Single Policies ................................ 166
5.4.3.1 Emissions Trading ..................... 166
5.4.3.2 Emissions Tax ......................... 166
5.4.3.3 Output Tax ............................ 167
5.4.4 Policy Mix A: Emissions Trading and
Homogeneous Taxation of Emissions .............. 168
5.4.4.1 Firms' Choices ........................ 168
5.4.4.2 The Policy Mix Compared with
Emissions Trading ..................... 168
5.4.5 Policy Mix B: Emissions Trading and
Heterogeneous Taxation of Emissions ............ 169
5.4.5.1 Firms' Choices ........................ 169
5.4.5.2 The Policy Mix Compared with
Emissions Trading ..................... 170
5.4.5.3 Implications of Output Market
Interactions .......................... 171
5.4.6 Policy Mix C: Emissions Trading and
Homogeneous Taxation of Output ................. 174
5.4.6.1 Firms' Choices ........................ 174
5.4.6.2 The Policy Mix Compared with
Emissions Trading ..................... 175
5.4.7 Policy Mix D: Emissions Trading and
Heterogeneous Taxation of Output ............... 176
5.4.7.1 Firms' Choices ........................ 176
5.4.7.2 The Policy Mix Compared with
Emissions Trading ..................... 177
5.5 Summary ............................................... 178
6 Evaluation of the Climate Policy Mix in the German
Electricity Sector ......................................... 183
6.1 Introduction .......................................... 183
6.2 ETS and Feed-in Tariffs for Renewable Electricity
Generation ............................................ 184
6.2.1 Addressing Climate Change: Overcoming
a Pollution Externality and Learning
Spillovers ..................................... 185
6.2.1.1 Theoretical Rationale for Using
the Policy Mix ........................ 185
6.2.1.2 Issue 1: Recipients of the Feed-in
Tariff ................................ 186
6.2.1.3 Issue 2: Scope of the Feed-in
Tariff ................................ 188
6.2.1.4 Issue 3: Differentiation of the
Feed-in Tariff with respect to
Technologies .......................... 189
6.2.1.5 Issue 4: Degression of the Feed-in
Tariff ................................ 190
6.2.1.6 Issue 5: Feed-in Tariff Irrespective
of Electricity Price .................. 190
6.2.1.7 Issue 6: Funding of the Feed-in
Tariff Endogenous to the Electricity
Sector ................................ 192
6.2.1.8 Issue 7: Partial Overlap of ETS and
Feed-in Tariff ........................ 196
6.2.2 Addressing Climate Change: Overcoming
a Pollution Externality and Other Barriers to
Technological Change ........................... 202
6.2.3 Addressing Climate Change and Other Policy
Objectives ..................................... 205
6.2.4 Policy Recommendation .......................... 207
6.3 ETS and Electricity Tax ............................... 211
6.3.1 Addressing Climate Change: Overcoming
a Pollution Externality ........................ 211
6.3.1.1 Issue 1: Heterogeneous Taxation of
ETS Participants ...................... 212
6.3.1.2 Issue 2: Taxation of Output ........... 217
6.3.1.3 Issue 3: Heterogeneous Taxation of
Electricity Consumers ................. 219
6.3.2 Addressing Climate Change: Overcoming
a Pollution Externality and Barriers to
Efficient Energy Generation and Consumption .... 220
6.3.3 Addressing Climate Change and Other Policy
Objectives ..................................... 221
6.3.4 Policy Recommendation .......................... 224
6.4 ETS and CHP Bonus ..................................... 226
6.4.1 Addressing Climate Change: Overcoming
a Pollution Externality and Learning
Spillovers ..................................... 227
6.4.1.1 Theoretical Rationale for Using the
Policy Mix ............................ 227
6.4.1.2 Issue 1: Recipients of the CHP
Bonus ................................. 228
6.4.1.3 Issue 2: Degression of the CHP
Bonus ................................. 228
6.4.1.4 Issue 3: CHP Bonus Paid in Addition
to Electricity Price .................. 229
6.4.1.5 Issue 4: Funding of the CHP Bonus
Endogenous to the Electricity
Sector ................................ 229
6.4.1.6 Issue 5: Partial Overlap of ETS and
CHP Bonus ............................. 230
6.4.2 Addressing Climate Change: Overcoming
a Pollution Externality and Other Barriers
to Technological Change ........................ 232
6.4.3 Addressing Climate Change and Other Policy
Objectives ..................................... 233
6.4.4 Policy Recommendation .......................... 234
6.5 ETS and Low-Interest Loans for Technology Innovation
and Diffusion ......................................... 235
6.5.1 Addressing Climate Change: Overcoming
a Pollution Externality and Barriers to
Technological Change ........................... 235
6.5.2 Policy Recommendation .......................... 236
6.6 ETS and Eco-Design Standards .......................... 236
6.6.1 Addressing Climate Change: Overcoming
a Pollution Externality and Barriers to Using
Energy-Efficient Appliances .................... 236
6.6.2 Addressing Climate Change and Other Policy
Objectives ..................................... 238
6.6.3 Policy Recommendation .......................... 238
6.7 ETS and Energy Labelling for Household Appliances ..... 239
6.7.1 Addressing Climate Change: Overcoming a
Pollution Externality and Asymmetric
Information .................................... 239
6.7.2 Addressing Climate Change and Other Policy
Objectives ..................................... 242
6.7.3 Policy Recommendation .......................... 242
6.8 ETS and Voluntary Agreement ........................... 243
6.8.1 Addressing Climate Change: Overcoming
a Pollution Externality ........................ 243
6.8.2 Addressing Climate Change and Other Policy
Objectives ..................................... 246
6.8.3 Policy Recommendation .......................... 247
6.9 Summary ............................................... 247
7 Conclusion: Major Results, Transferability and Avenues
for Future Research ........................................ 251
7.1 Major Results ......................................... 252
7.1.1 Identification of Economic Rationales for
Using a Policy Mix for Pollution Control ....... 252
7.1.2 Integration of Design Complexity into Models
of a Climate Policy Mix ........................ 254
7.1.3 Evaluation of the Climate Policy Mix in the
German Electricity Sector ...................... 256
7.2 Transferability of Results to Other Policy Contexts ... 257
7.2.1 Identification of Economic Rationales for
Using a Policy Mix for Pollution Control ....... 257
7.2.2 Integration of Design Complexity into Models
of a Climate Policy Mix ........................ 259
7.2.3 Evaluation of the Climate Policy Mix in the
German Electricity Sector ...................... 260
7.3 Avenues for Future Research ........................... 261
7.4 Outlook ............................................... 265
Annex ......................................................... 267
A.l Activities and Installations Subject to the ETS
According to Annex I TEHG ................................. 267
A.2 Emission Factors Applied under the ETS According to
Annex 3 ZuG 2012 .......................................... 270
A.3 Standard Utilization Factors Applied under the ETS ........ 271
A.4 Indicators and Energy Efficiency Classes by Appliances
Applied for Energy Labelling .............................. 273
A.5 Information Required for Labels, Fiches and Mail Order
Catalogues by Appliances Applied for Energy Labelling ..... 275
References .................................................... 277
Figures
Figure 2-1: Development of ETS allowance price for
the commitment period 2008 — 2012 ........................... 28
Figure 2-2: Development of the EEG add-on to the electricity
price 2000 - 2008 (in 2007 prices) .......................... 34
Figure 2-3: Development of the KWK add-on to the electricity
price for final customers with an annual consumption of less
than 100 MWh 2002 - 2009 .................................... 41
Figure 2-4: Energy Labels for Washing Machines, Electric
Stoves and Air Conditioners ................................. 50
Figure 5-1: Heterogeneous emissions tax and optimal
homogeneous emissions tax .................................. 143
Figure 5-2: Combining emissions trading and a homogeneous
emissions tax .............................................. 146
Figure 5-3: Welfare effects of combing emissions trading
and a heterogeneous emissions tax compared to a single
emissions trading scheme ................................... 152
Figure 5-4: Welfare effects of combining emissions trading
and a heterogeneous emissions tax compared with a single
heterogeneous tax: The case of linear marginal abatement
costs ...................................................... 155
Figure 5-5: Welfare effects of combining emissions trading
and a heterogeneous emissions tax compared to a single
heterogeneous tax: The case of convex marginal abatement
costs ...................................................... 157
Tables
Table 2-1: Quantified emission limitation and reduction
commitments of the Parties to the Kyoto Protocol as
stated in Annex В (UN 1998) .................................. 17
Table 2-2: Quantified emission limitation and reduction
commitments of the EU Member States as determined by
the EU Burden Sharing Agreement (Council of the European
Union 2002) ................................................. 19
Table 2-3: Allowance allocation procedures under the ETS
according to the ZuG 2012 ................................... 26
Table 2-4: Overview of Feed-in Tariffs under the German
Renewable Energies Act (EEG) ................................ 32
Table 2-5: Activities of the Manufacturing Sector Exempt From
the Electricity Tax ......................................... 36
Table 2-6: CHP bonuses ......................................... 40
Table 4-1: Deviations in policy mix design between
theoretical studies and the German case .................... 113
Table 5-1: Deviations in designing a policy mix of emissions
trading and taxation between theoretical analyses and the
German case study .......................................... 132
Table 5-2: Efficiency of firm decisions under different
policy mixes of emissions trading and taxes ................ 180
Table 6-1: Evaluation of different policy combinations for
the German context ......................................... 249
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