An evolving risk perspective for policy instrument choice in sustainability transitions

Lena Kitzing*, Oscar Fitch-Roy, Marco Islam, Catherine Mitchell

*Corresponding author for this work

Research output: Contribution to journalJournal articleResearchpeer-review

Abstract

We develop the concept of evolving risk to demonstrate that the optimal policy choice between price and quantity instruments may change over time. Drawing from system innovation, evolutionary concepts and modern financial and transaction cost economics, we analyze dynamic cost and welfare impacts of instrument choice under uncertainty. In early market deployment of niche technologies, economic and system-innovation arguments suggest price instruments can stabilize revenues and decrease market risks for investors. This accelerates deployment without necessarily compromising economic efficiency. Protective policies that work well for niche technologies should, however, be used cautiously during market upscaling and diffusion, due to the changing nature of risks. We use theoretic arguments and a case to demonstrate that a gradual shift towards quantity control may become preferable for welfare maximization under certain circumstances. Solar photovoltaics in Germany serves as illustrative case, where auctions (a form of quantity control) succeeded feed-in tariffs (a price instrument).
Original languageEnglish
JournalEnvironmental Innovation and Societal Transitions
ISSN2210-4224
DOIs
Publication statusAccepted/In press - 2020

Cite this

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title = "An evolving risk perspective for policy instrument choice in sustainability transitions",
abstract = "We develop the concept of evolving risk to demonstrate that the optimal policy choice between price and quantity instruments may change over time. Drawing from system innovation, evolutionary concepts and modern financial and transaction cost economics, we analyze dynamic cost and welfare impacts of instrument choice under uncertainty. In early market deployment of niche technologies, economic and system-innovation arguments suggest price instruments can stabilize revenues and decrease market risks for investors. This accelerates deployment without necessarily compromising economic efficiency. Protective policies that work well for niche technologies should, however, be used cautiously during market upscaling and diffusion, due to the changing nature of risks. We use theoretic arguments and a case to demonstrate that a gradual shift towards quantity control may become preferable for welfare maximization under certain circumstances. Solar photovoltaics in Germany serves as illustrative case, where auctions (a form of quantity control) succeeded feed-in tariffs (a price instrument).",
author = "Lena Kitzing and Oscar Fitch-Roy and Marco Islam and Catherine Mitchell",
year = "2020",
doi = "10.1016/j.eist.2018.12.002",
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An evolving risk perspective for policy instrument choice in sustainability transitions. / Kitzing, Lena; Fitch-Roy, Oscar; Islam, Marco; Mitchell, Catherine.

In: Environmental Innovation and Societal Transitions, 2020.

Research output: Contribution to journalJournal articleResearchpeer-review

TY - JOUR

T1 - An evolving risk perspective for policy instrument choice in sustainability transitions

AU - Kitzing, Lena

AU - Fitch-Roy, Oscar

AU - Islam, Marco

AU - Mitchell, Catherine

PY - 2020

Y1 - 2020

N2 - We develop the concept of evolving risk to demonstrate that the optimal policy choice between price and quantity instruments may change over time. Drawing from system innovation, evolutionary concepts and modern financial and transaction cost economics, we analyze dynamic cost and welfare impacts of instrument choice under uncertainty. In early market deployment of niche technologies, economic and system-innovation arguments suggest price instruments can stabilize revenues and decrease market risks for investors. This accelerates deployment without necessarily compromising economic efficiency. Protective policies that work well for niche technologies should, however, be used cautiously during market upscaling and diffusion, due to the changing nature of risks. We use theoretic arguments and a case to demonstrate that a gradual shift towards quantity control may become preferable for welfare maximization under certain circumstances. Solar photovoltaics in Germany serves as illustrative case, where auctions (a form of quantity control) succeeded feed-in tariffs (a price instrument).

AB - We develop the concept of evolving risk to demonstrate that the optimal policy choice between price and quantity instruments may change over time. Drawing from system innovation, evolutionary concepts and modern financial and transaction cost economics, we analyze dynamic cost and welfare impacts of instrument choice under uncertainty. In early market deployment of niche technologies, economic and system-innovation arguments suggest price instruments can stabilize revenues and decrease market risks for investors. This accelerates deployment without necessarily compromising economic efficiency. Protective policies that work well for niche technologies should, however, be used cautiously during market upscaling and diffusion, due to the changing nature of risks. We use theoretic arguments and a case to demonstrate that a gradual shift towards quantity control may become preferable for welfare maximization under certain circumstances. Solar photovoltaics in Germany serves as illustrative case, where auctions (a form of quantity control) succeeded feed-in tariffs (a price instrument).

U2 - 10.1016/j.eist.2018.12.002

DO - 10.1016/j.eist.2018.12.002

M3 - Journal article

JO - Environmental Innovation and Societal Transitions

JF - Environmental Innovation and Societal Transitions

SN - 2210-4224

ER -