The Dynamic Effects of Renewable Subsidies in the Green Energy Transition (Job Market Paper)

Abstract

The speed at which electricity generation can transition to green energy sources depends in part on the incentives of coal and natural gas plants to enter or exit. I examine how government subsidies and the costs of renewables shape those strategies. To do so, I formulate a nonstationary dynamic model of generator entry and exit that incorporates heterogeneity in entry costs and nests it within a dynamic, hourly model of competition in the wholesale electricity market. I estimate the model using data from Texas. I find that renewable subsidies in place during the sample period reduce cumulative CO2 emissions by 1.71 billion tons (or $62–$316 billion in environmental savings) through 2060, largely because they shift expectations about future competition and thereby reduce the entry of new coal plants in the early stage of the transition.