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An evolving risk perspective for policy instrument choice in sustainability transitions

Kitzing, Lena ; Fitch-Roy, Oscar ; Islam, Marco LU and Mitchell, Catherine (2020) In Environmental Innovation and Societal Transitions 35. p.369-382
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... (More)

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).

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author
; ; and
organization
publishing date
type
Contribution to journal
publication status
published
subject
keywords
Dynamic risk, Feed-in tariff, Innovation systems, Instrument choice, Sustainability transformation, Time-consistent policy
in
Environmental Innovation and Societal Transitions
volume
35
pages
14 pages
publisher
Elsevier
external identifiers
  • scopus:85059242571
ISSN
2210-4224
DOI
10.1016/j.eist.2018.12.002
language
English
LU publication?
yes
id
b6c2f6a7-e585-4b58-a668-ba7901c21c40
date added to LUP
2019-01-17 07:54:09
date last changed
2020-12-29 03:08:15
@article{b6c2f6a7-e585-4b58-a668-ba7901c21c40,
  abstract     = {<p>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).</p>},
  author       = {Kitzing, Lena and Fitch-Roy, Oscar and Islam, Marco and Mitchell, Catherine},
  issn         = {2210-4224},
  language     = {eng},
  pages        = {369--382},
  publisher    = {Elsevier},
  series       = {Environmental Innovation and Societal Transitions},
  title        = {An evolving risk perspective for policy instrument choice in sustainability transitions},
  url          = {http://dx.doi.org/10.1016/j.eist.2018.12.002},
  doi          = {10.1016/j.eist.2018.12.002},
  volume       = {35},
  year         = {2020},
}