The implications of cost reductions by "green" producers in energy markets employing tradable green certificates

As of 2016, so called “tradable green certificates “(TGCs) are being employed around the world as a mechanism for the promotion of electricity generation from renewable ("green")resources (i.e., wind, biogas, photovoltaic etc.). Typical justification for such initiatives include greenhouse gas mitigation, reducing dependence on oil imports and regional economic development, among others. As an example, the European Union has recently implemented the 20-20-20 plan, calling for, by the year 2020, a 20% reduction in carbon emissions, a 20% increase in energy efficiency and an increase in the share of renewable energy (RE) to 20%. We first demonstrate that a TGC market will in fact allow attainment of a politically determined renewable energy target in a socially efficient (i.e., welfare maximizing) manner. Within the context an energy market employing a TGC system, there is an expectation that as costs fall over time due to experiential learning in renewable energy equipment manufacturing and generation etc., the TGC market will be phased out as renewable energy (green) producers become competitive with conventional energy producers. We show, inter alia, that these cost reductions result in increased carbon emissions from conventional energy producers, thus undermining the greenhouse gas mitigation objective. In addition, we demonstrate that cost reductions by green producers can, paradoxically, result in lower profits for green producers and higher profits for conventional energy producers. Thus, in electricity markets employing TGC systems, cost padding by green producers in the form of rent-seeking activities, managerial perquisites and pure waste can be expected and must be guarded against.