Energy and climate policies are usually seen as measures to internalize externalities. However, as a side effect, the introduction of these policies redistributes wealth between consumers and producers, and within these groups. While redistribution is seldom the focus of the academic literature in energy economics, it plays a central role in public debates and policy decisions. This paper compares the distributional effects of two major electricity policies: support schemes for renewable energy sources, and CO2 pricing. We find that the redistribution effects of both policies are large, and they work in opposed directions. While renewables support transfers wealth from producers to consumers, carbon pricing does the opposite. More specifically, we show that moderate amounts of wind subsidies can increase consumer surplus, even if consumers bear the subsidy costs. CO2 pricing, in contrast, increases aggregated producer surplus, even without free allocation of emission allowances; however, not all types of producers benefit. These findings are derived from an analytical model of electricity markets, and a calibrated numerical model of Northwestern Europe. Our findings imply that if policy makers want to avoid large redistribution they might prefer a mix of policies, even if CO2 pricing alone is the first-best climate policy in terms of allocative efficiency.
This article assesses the relevance of ex post transaction costs in the choice of climate policy instruments in the EU (focusing mainly on the example of Germany) and the US. It reviews all publicly available empirical ex post transaction cost studies of climate policy instruments broken down by the main private and public sector cost factors and offers hypotheses on how these factors may scale depending on instrument design and other contextual factors. The key finding from the evaluated schemes is that it is possible to reject the hypothesis that asymmetries in ex post transaction costs across instruments are large and, thus, play a pivotal role in climate policy instrument choice. Both total and relative ex post transaction costs can be considered low. This conjecture differs from the experience in other areas of environmental policy instruments where high total transaction costs are considered to be important factors in the overall assessment of optimal environmental policy choice. Against this background, the main claim of this article is that in climate policy instrument choice, ex post transaction cost considerations play a minor role in large countries that feature similar institutional characteristics as the EU and the US. Rather, the focus should be on the efficiency properties of instruments for incentivizing abatement, as well as equity and political economy considerations (and other societally relevant objectives). In order to inform transaction cost considerations in climate policy instrument choice in countries that adopt new climate policies, more data would be desirable in order to enable more robust estimates of design- and context-specific transaction-cost scaling factors.