Evaluating Policies to Increase Electricity Generation from Renewable Energy*

Building on a review of experience in the United States and the European Union, this article advances four main propositions concerning policies aimed at increasing electricity generation from renewable energy. First, who bears the short-run costs of programs to subsidize the generation of electricity from renewable sources varies with the organization of the electric power industry, and this variation may be a significant contributor to such programs’ political attractiveness in U.S. states. Second, despite the greater popularity of feed-intariff (FIT) schemes worldwide, renewable portfolio standard (RPS) programs may involve less long-run social risk. Third, in contrast to the E.U.’s approach to reducing carbon dioxide emissions, its renewables program is almost certain not to minimize the cost of achieving its goals. Fourth, state RPS programs in the U.S. are also almost certain to cost more than necessary, even though most employ market mechanisms. To support this last proposition I provide a fairly detailed description of actual markets for renewable energy credits (RECs) and their shortcomings.