Are renewable energy policies climate friendly? The role of capacity constraints and market power

This paper studies the impacts of renewable energy support policies on energy prices, fossil
fuel supply and thus carbon emissions from fossil fuels. Such supports are climate friendly if
the renewables are already competitive against fossil fuels. But if the renewables are not yet
competitive, the climate change impacts are often ambiguous and are sensitive to capacity
constraints of renewables production and to the fossil fuel market structure. If the renewables
do not have capacity constraints, then the subsidies are subject to the Green Paradox under
perfect competition, but might be climate friendly under monopoly. Supports for capacity
constrained renewables under perfect competition lead to more current fossil fuel supply but
delay fossil fuel exhaustion time, and these effects are reversed under monopoly. Our results
highlight the importance of considering the long-term effects on fossil fuel supply as well as
capacity constraints and market power in designing renewable energy policies and evaluating
their carbon footprints.