A Principal-Agent Model for Optimal Incentives in Renewable Investments

Understand

We investigate the optimal regulation of energy production in alignment with the long-term goals of the Paris Climate Agreement.

• We analyze the optimal regulatory incentives to foster the development of non-emissive electricity generation when the demand for power is met either by a single firm or by two interacting agents.
• The regulator aims to encourage green investments to limit carbon emissions while simultaneously reducing the intermittency of total energy production.
• We find that the regulator can achieve a higher certainty equivalent by regulating two interacting firms, each investing in one technology, rather than a single firm managing both technologies.