Prices vs. percentages: use of tradable green certificates as an instrument of greenhouse gas mitigation

The paper analyzes the problem of achieving a target path of emission reductions in the electricity sector, using a scheme of tradable green certificates (TGC). There are two types of generation, renewable and fossil. The latter causes the emissions. The paper also examines effects from emission regulation on construction of new renewable generation capacity. Outcomes are compared with an emission fee and a subsidy. The analytical results are simulated with a numerical model and social surplus are calculated for the different instruments. Two versions of the percentage requirement are devised for the TGC scheme. Results show that the target path of emission reductions is achievable, but incentives for new renewable generation capacity will be sub-optimal, regardless of the version of the percentage requirement. The TGC scheme is neither the most accurate nor the most cost-efficient, instrument but it does lead to a smaller reduction of social surplus than a subsidy.