Market Failure and the Structure of Externalities To be included in : Harnessing Renewable Energy

Policies to promote renewable energy have been gaining momentum throughout the world, often justified by environmental and energy security concerns. This paper delves into the economic motivation for renewable energy policies by articulating the classes of market failures relevant to renewable energy. We describe how these market failures may vary atemporally or intertemporally, and why the temporal structure and the extent of the market failures are the critical considerations in the development of renewable energy policies. We discuss the key policy instruments and assess the extent to which they are well-suited to correct for market failures with different structures. The guidelines developed in this paper should provide motivation for more carefully designed renewable energy policies that are focused on correcting for particular market failures.