Are Renewable Quotas Effective to Reduce CO2 Emissions?

We quantify the intertemporal impact of a renewable quota on CO2 emissions, pollution and welfare. We find that the quota substitutes investments in base load technologies. Therefore, its environmental benefit depends on the emission intensity factors of base load technologies, not on system average emission intensity factors. In many systems hydro is the technology that expands with base load demand and then renewable quotas have little impact on emissions and pollution. We also find that quotas can be quite expensive and their impact is highly nonlinear. With detailed data on Chile’s system we estimate that a 5% quota is not binding, a 10% quota causes a small deadweight loss but a 20% quota multiplies the deadweight loss by a factor of 55, to about 7% of the system's supply cost. A renewable quota also rises the price paid by consumers and, with a 10% quota, they lose the equivalent to 3% of the system’s cost; with a 20% quota the loss rises by a factor of 5, equivalent to 16% of the system’s supply cost. Ricardian rents obtained by renewables’ generators are substantial. With a 10% quota they earn a rent which is equivalent to about 3% of the system’s cost of supply. With a 20% quota, Ricardian rents increase about four times, to about 12% of the system’s supply cost