Carbon Abatement with Renewables : Evaluating Wind and Solar Subsidies in Germany and Spain

This paper exploits the exogeneity of weather conditions to evaluate renewable energy (RE) subsidy programs in Germany and Spain in terms of their costs for reducing carbon dioxide emissions. We find that both the aggregate costs and the distribution of costs between energy producers and consumers vary significantly depending on which type of RE technology is promoted| - reflecting substantial heterogeneity in production costs, temporal availability of natural resources, and market conditions (i.e., time-varying demand, carbon intensity of installed production capacities, and opportunities for cross-border trade). We estimate that the costs for reducing one ton of CO2 emissions through subsidies for solar are e411-1'944. Subsidizing wind entails significantly lower costs, ranging from e82-276. While the economic rents for energy producers always decrease, consumers incur four to seven times larger costs when solar is promoted but gain under RE policies promoting wind