Too Good to Be True? Time-inconsistent Renewable Energy Policies

Abstract

The transition to low-carbon economies requires massive investments into renewable energies, which are commonly supported through regulatory frameworks. Yet, governments can have incentives – and the ability – to deviate from previously announced support policies once those investments have been made, which can deter investments. We analyze a renewable energy dynamic regulation game and derive under what conditions governments have incentives to deviate from their commitments. We then consider the effects of different support policy regimes and deployment targets on compliance. Last, with a numerical application of the model, we explain why Spain conducted retrospective changes in the period 2010–2013 whereas Germany stuck to its commitments.