ISSN 1397-4831

WORKING PAPER 04-2

Urs Steiner Brandt and Gert Tinggaard Svendsen

Switch Point and First-Mover Advantage: The Case of the Wind Turbine Industry

Department of Economics Aarhus School of Business

Switch Point and First-Mover Advantage: The Case of the Wind Turbine Industry

Urs Steiner Brandt and Gert Tinggaard Svendsen

Abstract
Why has the EU been so eager to continue the climate negotiations? Can it be solely attributed to the EU feeling morally obliged to be the main initiator of continued progress on the climate change negotiations, or can industrial interests in the EU, at least partly, explain the behaviour of the EU? We suggest that the individual member countries in the EU, such as Germany and Denmark, have a rational economic interest in forcing the technological development of renewable energy sources to get a first-mover advantage. Here, the Kyoto Protocol, which imposes binding greenhouse gas reductions on 38 OECD countries, implies that, as a first-mover, the EU will potentially sell the necessary new renewable technologies, most prominently wind mills, to other countries. In the latest EU proposal made in Johannesburg, the EU pushed for setting a target of 15% of all energy to come from sources such as windmills, solar panels and waves by 2015. Such a political target level would further the EUs interests globally, and could suggest, in economic terms, why the EU eagerly promotes greenhouse gas trade at a global level. In contrast, the US has left the Kyoto agreement to save the import costs of buying the EUs renewable energy systems.

JEL Classification: Q28, H2, H4

Keywords: Political economy, switch point, first mover advantage, wind turbine industry, greenhouse gases, Kyoto Protocol, EU.

Department of Environmental and Business Economics, University of Southern Denmark, usb@sam.sdu.dk. Department of Economics, Aarhus School of Business, Denmark, gts@asb.dk

1: INTRODUCTION

Currently, the EU is actively pursuing the promotion of renewable energy sources which has also been seen at the summit in Johannesburg where: The European Union has been pushing for a target of making 15% of energy come from sources such as windmills, solar panels and waves by 2015. The US is vehemently opposed to those targets, judging them unrealistic, and so are petroleum-producing countries (UN, 2002).

What can explain that the EU so actively promotes renewable energy? Is it due to a sense of being morally obliged to act against the threat of global warming, or is the EU trying to capitalise on its first mover advantage on renewable energy systems? We want to investigate how different ways of implementing of the Kyoto-agreement influence the relative competitiveness of windmills, and how this gives the EU incentives to shape policy in order to promote renewable energy sources.

There are several motives for supporting an industry. Porter (1990) argued in favour of protecting infant home industry against international competition in the short run. If prices do not represent real prices (e.g., due to the generation of negative externalities which are not accounted for) and taxation is not feasible, incentives exist to subsidize producers who do not create the negative externalities, like renewable energy systems. However, if this type of support yields a company or a country a first mover advantage, then incentives exist to exploit such advantages. As Reinhardt (1999) argues, managers should make environmental investments for the same reasons they make other investments, because they expect them to deliver positive returns or to reduce risks.1 In the same way a country should try to get a positive return on its advantage on renewable systems.

If the renewable energy systems are not competitive internationally without subsidies (or alternatively, taxes on the pollution systems) abroad, environmentalists and industrialists (producers of renewable energy systems) have an alignment of incentives. Yandle (1983) observed that environmentalists and industrialists form hidden alliances and this gave rise to his theory of Bootleggers and Baptists theory, which basically states that industrialists seek to promote a noncompetitive industry, under cover of morally based environmental rhetoric defined and defended by
Reinhardt (1999) identifies different approaches that companies can take to integrate the environment into their business thinking. Two of them are for companies to manage their competitors by imposing a set of private regulation or by helping to shape the rules written by government officials and that companies may be able to make systematic changes that will redefine competition in their markets.
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honest environmentalists. When searching for the motives behind the EU policy on climate change, we set out to analyse what incentives the EU have with respect to its green industries within renewable energy systems.

Most prominently, the development of the wind energy sector in the EU started after the first oil crisis in 1973, where the oil price was multiplied by four. The EU was, in contrast to the US, most vulnerable due to its dependence on oil imports from the Middle East. Therefore, by chance, the EU gained a first-mover advantage compared to the US within the renewable energy sector because energy use was strictly regulated in the EU. Most prominently, both energy taxation of fossil fuels and subsidy schemes for renewable energy are at a much higher level in the EU than in the US (Svendsen, 2003). In other words, if countries are to reduce greenhouse gases, most exports of green technologies will be from the EU.

Whether or not any particular first mover knowledge will turn out to be successful in terms of export earnings hinges on numerous factors. Two main factors that we focus on in this paper are the evolution of the production costs and changes in the relative prices due to implementation of emissions reduction obligations. The evolution of the production costs depends on the shape of the learning curve for the relevant technology (see e.g. Junginger et al (2003), and references in the article for learning curves for wind farms). The learning curve describes how unit costs of production change as the experience in using the technology increases. Ex ante, the exact shape of such a curve is uncertain, and a very interesting situation, from an analytical point of view, appears when the learning-by-doing cost reduction is not enough to make the technology competitive, unless consumers abroad pay the full price for the energy, i.e. a price reflecting both the private and the social costs of production (e.g Sims et al (2003) argue that wind based energy will not be competitive within a decade). This implies that whether or not the relevant technology can be exported to other countries depends on these countries emission reduction plans. In this case, the country with the first mover knowledge has a strong incentive to convince other countries that they also have an obligation to implement policies to reduce CO2 emissions. All this will be analysed by use of switch points, which describe how changes in the relative prices of different energy supply sources will change the composition of a countrys energy supply sector.

A general problem in international climate negotiations is the curse of being committed to cooperation in a prisoners dilemma environment. It is only in cases where a country making a unilateral move gets an unconditional first mover advantage that the country is able to escape the observation in Hoel (1991) that unilateral reductions never increase other countries reductions. Here countries must try to convince the other countries that they should implement renewable energy systems. Could this explain why the EU so eagerly tried to promote their industrial interests in Johannesburg by proposing a target of 15% of all energy to come from sources such as windmills? On the contrary, unilateral reductions can decrease other countries emissions if such actions reveal that costs are low. But this is only true if an unconditional first mover advantage exists (which could be the case for offshore windmills). By implementing the Kyoto target, a country inevitably provides more favourable conditions for wind energy. Our paper shows that whether or not this makes wind energy competitive to conventional energy production depends on the type of instrument used to make the relevant emissions reductions. If a sufficient number of countries agree on a common tradable permit market, and this market is well functioning, then it is not likely that changes in relative prices are sufficient to make wind-based energy competitive to conventional energy production.

This means that the EU could promote their industry by not supporting unrestricted trade in permits, under the presumption that lack of full access to trade will not influence the countries willingness to accept the original levels of reductions implied by the Kyoto-agreement.2 However, the intensified efforts of the EU to make the Kyoto-agreement unnecessarily expensive in the Hague had a serious drawback; it gave the US a perfect opportunity to leave the Kyoto-agreement, see Brandt and Svendsen (2002).

Energy markets are dynamic and the existence of a future need for more sustainable energy sources is hardly doubtable. As the Executive Director of the International Energy Agency (IEA), Robert Priddle, puts it: We are not on a sustainable energy path unless we make considerable changes. (IEA, 2002a). Furthermore, The IEA notes that a projected 57 per cent increase in mainly fossil-fuel based energy demand over the next 20 years will exert enormous pressure on the global environment. Huge investment demands, continued distortions in energy markets, growing
This last point has been questioned in several papers, see e.g. Nentjes and Woerdman (2000), Woerdman (2001) and Brandt and Svendsen (2003). See Christensen and Svendsen (1999) concerning the successful US experience on tradable permit systems.
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problems caused by the insatiable demand for transportation, and barriers to deployment of renewable energy technologies, all point to a need for countries to do more. Here, one of the main instruments will be to develop renewable energy further. For example, the German government has recently announced an ambitious plan to boost wind powers share of electricity consumption to at least 25 per cent by 2025. The lions share of this will come from a 2025,000 MW offshore wind capacity in the North and Baltic Seas. Within a generation () one fourth of our current electricity needs will be generated with environmentally-friendly wind power, says Environment Minister Jrgen Trittin (EWEA, 2002b).

The paper is organized as follows. Section 2 gives the theoretical background of first mover advantages and switch points. Section 3 reviews the relevant energy price estimates. Section 4 empirically analyses first movers and country market shares in the wind turbine market. Section 5 concludes the paper.

2: Switch points and first mover advantages

A shift from non-renewable fossil fuels to renewable wind energy will eventually happen because fossil fuel reserves are slowly being exhausted. For example, coal producers have to dig deeper mines or have to use less efficient coal. Therefore, marginal costs of energy production, based on fossil fuels, rise over time. In contrast, wind reserves are inexhaustible within near future. Thus, one may assume that within our interval, the marginal costs of wind energy production are constant. At a certain point in time, it pays to switch to a renewable resource, for example from coal to wind based energy in power plants. State regulation may then speed up this process if environmental costs are added to the price of fossil fuels, for example by taxing fossil fuels. Furthermore, a renewable energy substitute, such as wind energy, may be subsidised. The new switch point will therefore occur earlier on in time.

The switch point approach can also yield valuable insights into how different policy options influence the timing of switch points. To illustrate this point, Figure 1 shows a situation where only two possible types of energy production exist, coal fired and wind-based. Here we compare two policy options, a fully flexible situation, where no restriction on international trade in permits exists, and one where only domestic emission reductions are allowed. CoalNT identifies the price of energy

produced by coal in a non-trade scenario, while CoalFT is defined as the coal based energy price in a full trade situation. Obviously, wind-based energy production becomes competitive compared to coal-based energy production at a lower emissions reduction level in a non-trade situation.

Figure 1: Change in relative prices from different reductions policies Price of CoalNT energy
CoalFT Wind based

CO2 reductions Switch point

NT

Switch point

FT

First mover advantages in the case we consider relate to technological leadership that materializes in export opportunities. Such technological advances can either be the result of deliberate R&D in a selected area, or arise as side effects of other types of actions, e.g. political actions. It is possible to identify two different types of first mover advantages. The first type results when the gain from the achieved technological progress only materializes in exports to countries engaging in serious reductions of emissions (such that relative prices in those countries change in favour of the new technologies). The second type of first mover advantages exists, when it is possible to develop new technologies that are competitive even in situations where countries do not have reduction targets for the relevant pollutant. A consequence of this second type is that they in themselves trigger reductions in other countries.

How does the appearance of first mover advantages relate to the switch-points? The appearance of technological improvements on non-renewable energy sources also changes the switch points, but now in all countries that can integrate the new technology into their energy supply sector less cheaply than without such technological changes. As discussed in section 4, a number of countries have a large potential for wind based energy production. Hence, technological improvements also

accelerate the switch points abroad. Consequently, from the point of view of the country that makes the first move, this will make the investment in new technology more likely to be profitable.3

Let a country (or a firm in that country) develop a new technology for reducing emissions. Whether or not export opportunities exist for this technology depends on three main factors. Firstly, the installation and operation costs of the new technology are competitive compared to existing technologies. Secondly, the relative emission reduction from this new technology compared to existing technologies also increases the competitiveness of the new technology. Thirdly, the level of emissions reduction in the countries that import the new technology is decisive when considering the level of reduction and the type of instruments used to achieve the emission targets in question. Consequently, the lower the installation and operation costs, the higher the reduction targets and the higher the reduction that the new technology enables, the more likely it is that the new technology can be exported.

3. Will the Kyoto Protocol make wind energy competitive?

Although prices of energy produced by windmills have been falling due to the learning by doing effect, as discussed in Hansen et al4 (2003), the simple projection of the trend presented in Figure 2 shows that the potential for further cost reductions is likely to be small in terms of the estimated average windmill price per kW over time.5 Hence, the most likely reason for wind-energy to be competitive is its environmental advantage.

Note, however, that first mover advantages are not likely to be everlasting, since other technologies might also become competitive, see, e.g., figure 3. 4 The technological development following learning-by-doing within the wind turbine industry is impressive: Wind turbines have grown dramatically in size and performance during the past 15 years. The early machines of 25 kW with 10.6-metre rotor diameter can still be found in Denmark, but today the most widely sold turbines have a rated power output of 7501000 kW and a rotor diameter of 4854 metres. The largest machines commercially available are 2,500 kW machines with 80-metre rotor diameter placed on 7080 metre towers. Each 2,500 kW machine produces more energy than 200 old 1980 vintage machines. Productivity has thus increased rapidly. (Krohn, 2001). The crucial parameter is the diameter of the turbine the longer the blades, the larger the areas swept by the turbine and the greater the energy output. Therefore, the trend is towards larger machines. 5 The technological development has been stimulated both by the process and product innovations as the capacity of the individual mill has increased; see Madsen et al (2003).

Figure 2: Price per mill DKK/kW, 1980 prices

price per mill in DKK/kW, 1980 prices 8000 7000 6000 5000 4000 3000 2000 1000 0
19 83 19 85 19 87 19 89 19 91 19 93 19 95 19 97 19 99 20 01 20 03 20 05 20 07

price per mill in DKK/kW projection of price

Source: Hansen et al (2003), table 1, page 4.

In order to determine whether or not implementation of the Kyoto-protocol is sufficient to make the wind-based energy production competitive, we first need to establish the relevant size of the emission tax equal to the marginal cost of reduction (the implicit price of CO2). Next, we need an estimate of the marginal costs from using different instruments to implement the Kyoto-protocol. If the marginal cost of implementing Kyoto-protocol exceeds the necessary tax, then this indicates that wind-based energy will become more competitive.

Concerning the relevant size of the emission tax, Hansen et al (2003) calculate how much the tax on CO2 emissions must be in order for the wind-based energy production to be cheaper than coal-based production. Table 1 relates the present value of the yearly loss from all energy generated by windmills (compared to conventional energy production) to the total savings of CO2 emissions for a period of production of 10 and 15 years, respectively. This means that a tax on CO2 per ton ranging from 9.2$ (in the 15 years and 3% case) to 29.8$ (in the 10 years and 5% case) will make windmills competitive compared to conventional energy production. This result makes it easier to analyse when windmills will gain comparative advantages.

Table 1 Implicit price of CO2 Real interest rate $ per ton, 1998 prices 10 years 3% 25.5 5% 29.8 15 years 3% 9.2 5% 12.9 Reproduced from Hansen et al (2003), table 4, page 16

Concerning the marginal costs of implementing the Kyoto-target, Table 2 shows estimates under the two policy options used in Figure 1.

Table 2: Estimates of marginal costs of implementing the Kyoto-protocol Reported in: Clinton Administration (1998) Nordhaus and Boyer (1999) Zhang (2000) Nentjes and Woerdman (2000) Manne and Richels (1998)
a b

Cost efficient ($ per ton)a Domestic implementation ($ per ton)b 14-23 11 125 9.7 250 70 240

) The marginal costs of meeting the Kyoto target with unlimited access to flexible mechanisms. ) The marginal costs of meeting the Kyoto target when no flexible mechanisms are feasible.

Note, that there is a large variation in the estimates presented in Table 2. Thus, the comparison of numbers in Tables 1 and 2 should only be thought of as indicative. Keeping this reservation in mind, a comparison reveals important information: While it is not assured that windmills will be competitive as long as cost efficient measures, in particular a tradable permit system, are implemented, windmills receive a large competitive advantage when only domestic implementation is allowed.6 The range of estimates for the marginal reduction costs is 9.7-70$/ton given a costefficient implementation of the Kyoto protocol. In comparison, the range of estimates for the necessary tax to make wind-based energy-production competitive is 9.2-29.8$/ton. Because the estimates are positioned within the same range of figures, it is not possible to establish whether wind-based energy production will become competitive even when implementing the Kyoto Protocol.
This comparison is only valid given a number of assumptions: reductions are only covered by making coal based energy production sufficiently more costly, energy prices are determined by marginal cost prices, and finally, windmills are just as effective abroad as in Denmark.
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Crucially, this result could explain why the EU has been eager to make the costs of meeting the targets implied by the Kyoto agreement unnecessarily high by arguing for serious restrictions on free trade in CO2-permits (Svendsen, 2003). Free trade, under the best circumstances, could reduce marginal reduction costs significantly and keep conventional power plants more competitive than renewable energy sources.

The windmill industry provides an example of the two different types of first mover advantages. As long as the price of energy remains between the prices of conventional energy supply with and without pollution control costs, the first type of first-mover advantage exists. On the other hand, when prices for energy from windmills fall below the price of conventional energy supplies, regardless of prevailing state of emission reductions, there is an unconditional first-mover gain.7 Consequently, the first mover advantages of the first type related to the climate change issue are closely connected to the relative price of energy output of different energy producing processes.

However, the costs of producing energy by use of conventional energy systems could also change when exposed to greater pressure from competition. In order to get an idea of this, note that energy technologies reflect differences in costs and levels of development and can (as done in Grbler et al, 1999), be placed into three groups. The mature technology has received widespread usage and has well known specifications (e.g. combustion gas turbine, gas combined and conventional coal power plants). Such technologies can be changed or improved under pressure from competition, but both the costs and the general level of energy efficiency are relatively stable. The incremental technologies have higher costs and exist in niche markets (e.g., biomass power plants, coal combustion cycle power plants, nuclear power plants and wind). They have the potential for higher efficiency and potential cost reductions if investment and development continue. The radical technologies are, by definition, not widespread but open to radical improvements in performance and costs (e.g., geothermal power plants, solar thermal power plants and PV-solar).8

This is important, since environmental targets change relative prices, and then also create incentives to make existing technologies more (energy) efficient. As seen from Figure 3, since the
Another example is the Montreal protocol, as discussed in section 3. See Grbler et al (1999) for a very detailed discussion of the dynamics of energy technologies and a more thorough description of the different phases in the development of new technologies.
8 7

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conventional energy-producing sector can be placed into the mature sector, costs of production will probably not change significantly as competition increases.

Figure 3 Position of technologies on the learning curve9

Costs Variations in costs Radical Incremental Mature

Technologies

The conclusion so far is that within the range of estimates presented in this paper, whether or not the implementation of the Kyoto-protocol makes wind energy competitive depends on which instruments are used to achieve the Kyoto targets. If the Kyoto targets are met without the use of flexible mechanisms, then wind energy will be competitive compared to coal-based energy production. On the other hand, if the full use of flexible mechanisms is allowed, then it is ambiguous whether or not wind energy will be competitive. Figure 3 also reveals that new and radical technologies also have the potential to be more competitive, if the price of conventional energy production increases. In light of this, the EU proposal in Johannesburg has been pushing for a target of 15% of energy to come from sources such as windmills, solar panels and waves by 2015 and it might have resulted from interests other than purely environmental ones.

Mature technologies in widespread use have lower costs with lower variance; the costs of radical new technologies are higher and more variable. Variability of costs is also an indicator of the uncertainty of technology costs. Radical technologies are not much tried.

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4: First movers and country market shares

The rapid development of the wind turbine industry is caused by the subsidisation of wind energy since the first oil crisis in 1973. This story seems to fit the ideas of Porter (1990) who argues that it may pay a country to subsidise its industries for a period. Building up a strong home market will clear the road for exports and a profitable industry in the longer run. As argued by Madsen et al. (2003), the early subsidies for alternative energy sources from the Danish government created a big home market for wind turbines, and gave the Danish producers first mover advantages in the world market. However, an important condition for a successful outcome of such first mover advantages is the existence of learning-by-doing and technological development within the industry, which could further reduce the production costs and consolidate the competitive advantages of the industry (ibid.).

The most important subsidy has been a price guarantee per produced kWh (kilowatt-hour): Without these subsidies, windmills as suppliers of electricity would not have been competitive compared to traditional power plants and hence the producers of windmills would not have got a foothold in the Danish industry. This is also illustrated by the development in demand where a large part of the wind turbines produced in the pioneering years in the 1980s were sold domestically whereas exports made up a substantial part of sales in the 1990s. (Madsen et al, 2003, p. 1). In Denmark, 15 per cent of all electricity in 2000 was from wind energy (BTM Consult, 2001).

Madsen et al (2003) describe the formidable market development within the wind turbine industry. They note that since the 1980s, Danish (and German) wind turbine producers in particular have gained a leading position in this new industry. In 1999, Danish wind turbine producers had a market share of half the world market with a turnover of some $1.5 billion out of a total market of $3 billion, and in 19941999 the wind industry grew at a rate of some 40 per cent per annum, and growth rates of around 20 per cent per year are foreseen for the first decade of the new millennium.

Overall, the historical reasons for subsidising the wind turbine industry are strong environmental concerns in Denmark, but they also seem to confirm the idea of achieving an economic net gain for the country: A majority in the Danish Parliament consisting of the Left Wing Socialists and the centre parties supported the development of wind power. Otherwise it could not have been done. In

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addition to their interest in the environment, they realised that there was a potential for job creation and export possibilities that would bring foreign exchange to the country. (Trans, 2001a; 2001b). Today, the wind turbine industry accounts for 12,000 jobs in Denmark while component supplies and installation of Danish turbines currently create another 6,000 jobs worldwide. Wind energy employs some 40,000 people worldwide, and 30,000 in the EU (Krohn, 2001).

Concerning market size, Germany, Spain and the US were the three largest markets in 2001 on an accumulated basis. The markets of the US, India and China are still relatively small compared to Germany and Denmark, for example. Russia, which also has a huge potential, is not even within the top ten. Total installed mega watts (MW) have almost been doubled in size from 1998 to 2000 (BTM Consult, 2001).

From figure 4 it is clear that EU wind turbine producers dominate the product market rather than US producers. Each nations share of the market in 2000 amounts to 51 per cent for Denmark, 18 per cent for Spain, 16 per cent for Germany and 15 per cent for the rest. Many producers in the Others group will be located in the EU too. Thus, the market is clearly dominated by EU wind turbine producers who have more than a 85 per cent market share.

Figure 4: Country market shares in 2000.

0,6 0,5 0,4 0,3 0,2 0,1 0 Denmark Spain Germany US India japan Others

Note: Export is defined as the sales by the nation where the headquarters are situated. Source: BTM Consult (2001, p. 13).

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Note furthermore, that wind turbine producers operate world-wide, typically exporting about three quarters of their total production. The biggest wind turbine producer, Danish Vestas, for example, had a 83.4 per cent average export share for 3 years (19982000), ibid.

So far, wind markets have primarily been driven by environmental concerns and political reasons in Western Europe. However, with respect to future market development, a number of huge potential markets exist for profitable wind energy production. In particular, Canada and Mexico (non-Annex B countries) have favourable land and wind conditions. China has heavy pollution problems along its east coast due to the extensive use of fossil fuels that create local pollution, such as oxides of sulphur and nitrogen (which are a cause of acid rain). Therefore, China, in need of clean wind energy, is also a huge potential market, with its enormous potential of wind resources along the coastal area, on the offshore islands and Inner Mongolia. Similarly, the wind market potential of Russia with its vast areas and excellent wind conditions is unique. Furthermore, the learning curve in Figure 3 might underestimate the potential of wind energy. The reason is that offshore wind power is expected by some to be the big thing in the future.

In Madsen et al (2003) the relationship between size of a windmill and the costs/kW is estimated and it is clearly negative. Off-shore wind turbines are expected to reach the size of 5 MW in the beginning of the next decade, which will reduce costs of wind-based energy production considerably (EWEA, 2002c). Thus, if offshore-based energy production turns out to reduce production costs more than estimated in Figure 3, then the likelihood that windmills become competitive, even if a cost effective approach is chosen to implement the Kyoto targets, is increased. According to Eddie OConnor, Vice President of the European Wind Energy Association: The development of major offshore wind energy parks will be the biggest energy revolution since the internal combustion engine EWEA (2002a).

5: CONCLUSION Overall, we suggested that EU climate policy could be explained by the potential first mover advantages. Individual member states such as Germany and Denmark have large potential first mover advantages if other countries face demanding greenhouse gas reduction obligations as well.

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These first mover advantages and large country market shares stem from knowledge in renewable energy technology. Promoting green industries in the EU could explain, in economic terms, why the EU eagerly promotes greenhouse gas trade at a global level whereas the US has left the Kyoto agreement to save the import costs of buying the EUs renewable systems. We noted, how the wind energy market, for example, is booming at the moment having a strong export orientation.

As argued, the reason for the development of the EU wind turbine industry is that wind energy has been subsidised following the first oil crisis in 1973. The most important subsidy has been a price guarantee per produced kWh (kilowatt-hour), which enabled the windmill industry to gain a strong foothold in Germany and Denmark, for example. Without subsidies, our analysis shows that implementing the Kyoto-targets is not necessarily enough to make wind-based energy systems competitive under free market conditions. As seen from our analysis, the potential for much larger exports can only be realised when the Kyoto-targets are implemented successfully and, in particular, if they are not implemented in a cost-efficient way. This suggests that the EU proposed restrictions on trade in permits after the Kyoto agreement at The Hague in 2000 to promote the green EU export industries.

In perspective, one may discuss whether it could pay a country to subsidise its industries for a period. Building up a strong home market for infant industries may clear the road for exports and a profitable industry in the longer run. Normally, it is not possible for a government to pick the right winners in advance this is a market task. Rather, the best way for a government to promote technological progress is to get the prices right. By internalising all external costs of production, the right prices will emerge, sending the right signals to the markets, resulting in necessary structural changes that reflect our knowledge about the state of the environment. Thus, one may argue that the subsidy of the wind turbine industry in both Germany, Denmark and Spain indeed seems to have been a lucky punch because the external cost of the greenhouse effect has eventually materialised itself in international agreements to fight it.

The future looks bright for self-supply energy systems and the everlasting resource of wind power for three main reasons. First, the fact that ratification and implementation of the Kyoto Protocol seems most likely in the absence of the United States. Both China and India have lately shown much interest in participating and reaping the gains from trade. Second, the fact that wind energy is

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now becoming competitive, with fossil based energy at prices around 4 $cents per kWh and with offshore parks as a new and promising technological option. What is more, the cost of wind energy is falling, whilst other fossil fuel energy technologies are becoming more expensive as they are exhausted. Third, the fact that international demand for energy diversity has increased. This is to reduce the risk of not getting access to imported fossil fuels, especially after 11 September 2001.

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Department of Economics:

Skriftserie/Working Paper:

2002: WP 02-1 Peter Jensen, Michael Rosholm and Mette Verner: A Comparison of Different Estimators for Panel Data Sample Selection Models. ISSN 1397-4831. WP 02-2 Erik Strjer Madsen, Camilla Jensen and Jrgen Drud Hansen: Scale in Technology and Learning-by-doing in the Windmill Industry. ISSN 1397-4831. Peter Markussen, Gert Tinggaard Svendsen and Morten Vesterdal: The political economy of a tradable GHG permit market in the European Union. ISSN 13974831.

WP 02-3

WP 02-4 Anders Frederiksen og Jan V. Hansen: Skattereformer: Dynamiske effekter og fordelingskonsekvenser. ISSN 1397-4831. WP 02-5 Anders Poulsen: On the Evolutionary Stability of Bargaining Inefficiency. ISSN 1397-4831. Jan Bentzen and Valdemar Smith: What does California have in common with Finland, Norway and Sweden? ISSN 1397-4831. Odile Poulsen: Optimal Patent Policies: A Survey. ISSN 1397-4831. Jan Bentzen and Valdemar Smith: An empirical analysis of the interrelations among the export of red wine from France, Italy and Spain. ISSN 1397-4831. A. Goenka and O. Poulsen: Indeterminacy and Labor Augmenting Externalities. ISSN 1397-4831.

WP 02-6

WP 02-7 WP 02-8

WP 02-9

WP 02-10 Charlotte Christiansen and Helena Skyt Nielsen: The Educational Asset Market: A Finance Perspective on Human Capital Investment. ISSN 1397-4831. WP 02-11 Gert Tinggaard Svendsen and Morten Vesterdal: CO2 trade and market power in the EU electricity sector. ISSN 1397-4831. WP 02-12 Tibor Neugebauer, Anders Poulsen and Arthur Schram: Fairness and Reciprocity in the Hawk-Dove game. ISSN 1397-4831. WP 02-13 Yoshifumi Ueda and Gert Tinggaard Svendsen: How to Solve the Tragedy of the Commons? Social Entrepreneurs and Global Public Goods. ISSN 1397-4831. WP 02-14 Jan Bentzen and Valdemar Smith: An empirical analysis of the effect of labour market characteristics on marital dissolution rates. ISSN 1397-4831.

WP 02-15 Christian Bjrnskov and Gert Tinggaard Svendsen: Why Does the Northern Light Shine So Brightly? Decentralisation, social capital and the economy. ISSN 13974831. WP 02-16 Gert Tinggaard Svendsen: Lobbyism and CO2 trade in the EU. ISSN 1397-4831. WP 02-17 Sren Harck: Reallnsaspirationer, fejlkorrektion og reallnskurver. ISSN 13974831. WP 02-18 Anders Poulsen and Odile Poulsen: Materialism, Reciprocity and Altruism in the Prisoners Dilemma An Evolutionary Analysis. ISSN 1397-4831. WP 02-19 Helena Skyt Nielsen, Marianne Simonsen and Mette Verner: Does the Gap in Family-friendly Policies Drive the Family Gap? ISSN 1397-4831. 2003: WP 03-1 Sren Harck: Er der nu en strukturelt bestemt langsigts-ledighed I SMEC?: Phillipskurven i SMEC 99 vis--vis SMEC 94. ISSN 1397-4831. WP 03-2 Beatrice Schindler Rangvid: Evaluating Private School Quality in Denmark. ISSN 1397-4831. Tor Eriksson: Managerial Pay and Executive Turnover in the Czech and Slovak Republics. ISSN 1397-4831. Michael Svarer and Mette Verner: Do Children Stabilize Marriages? ISSN 13974831. Christian Bjrnskov and Gert Tinggaard Svendsen: Measuring social capital Is there a single underlying explanation? ISSN 1397-4831. Vibeke Jakobsen and Nina Smith: The educational attainment of the children of the Danish guest worker immigrants. ISSN 1397-4831. Anders Poulsen: The Survival and Welfare Implications of Altruism When Preferences are Endogenous. ISSN 1397-4831. Helena Skyt Nielsen and Mette Verner: Why are Well-educated Women not Fulltimers? ISSN 1397-4831. Anders Poulsen: On Efficiency, Tie-Breaking Rules and Role Assignment Procedures in Evolutionary Bargaining. ISSN 1397-4831.

WP 03-3

WP 03-4

WP 03-5

WP 03-6

WP 03-7

WP 03-8

WP 03-9

WP 03-10 Anders Poulsen and Gert Tinggaard Svendsen: Rise and Decline of Social Capital Excess Co-operation in the One-Shot Prisoners Dilemma Game. ISSN 13974831.

WP 03-11 Nabanita Datta Gupta and Amaresh Dubey: Poverty and Fertility: An Instrumental Variables Analysis on Indian Micro Data. ISSN 1397-4831. WP 03-12 Tor Eriksson: The Managerial Power Impact on Compensation Some Further Evidence. ISSN 1397-4831. WP 03-13 Christian Bjrnskov: Corruption and Social Capital. ISSN 1397-4831. WP 03-14 Debashish Bhattacherjee: The Effects of Group Incentives in an Indian Firm Evidence from Payroll Data. ISSN 1397-4831. WP 03-15 Tor Eriksson och Peter Jensen: Tidsbegrnsade anstllninger danska erfarenheter. ISSN 1397-4831. WP 03-16 Tom Coup, Valrie Smeets and Frdric Warzynski: Incentives, Sorting and Productivity along the Career: Evidence from a Sample of Top Economists. ISSN 1397-4831. WP 03-17 Jozef Koning, Patrick Van Cayseele and Frdric Warzynski: The Effects of Privatization and Competitive Pressure on Firms Price-Cost Margins: Micro Evidence from Emerging Economies. ISSN 1397-4831. WP 03-18 Urs Steiner Brandt and Gert Tinggaard Svendsen: The coalition of industrialists and environmentalists in the climate change issue. ISSN 1397-4831. WP 03-19 Jan Bentzen: An empirical analysis of gasoline price convergence for 20 OECD countries. ISSN 1397-4831. WP 03-20 Jan Bentzen and Valdemar Smith: Regional income convergence in the Scandinavian countries. ISSN 1397-4831. WP 03-21 Gert Tinggaard Svendsen: Social Capital, Corruption and Economic Growth: Eastern and Western Europe. ISSN 1397-4831. WP 03-22 Jan Bentzen and Valdemar Smith: A Comparative Study of Wine Auction Prices: Mouton Rothschild Premier Cru Class. ISSN 1397-4831. WP 03-23 Peter Guldager: Folkepensionisternes incitamenter til at arbejde. ISSN 1397-4831. WP 03-24 Valrie Smeets and Frdric Warzynski: Job Creation, Job Destruction and Voting Behavior in Poland. ISSN 1397-4831. WP 03-25 Tom Coup, Valrie Smeets and Frdric Warzynski: Incentives in Economic Departments: Testing Tournaments? ISSN 1397-4831. WP 03-26 Erik Strjer Madsen, Valdemar Smith and Mogens Dilling-Hansen: Industrial clusters, firm location and productivity Some empirical evidence for Danish firms. ISSN 1397-4831.

WP 03-27 Aycan elikaksoy, Helena Skyt Nielsen and Mette Verner: Marriage Migration: Just another case of positive assortative matching? ISSN 1397-4831. 2004: WP 04-1 Elina Pylkknen and Nina Smith: Career Interruptions due to Parental Leave A Comparative Study of Denmark and Sweden. ISSN 1397-4831. Urs Steiner Brandt and Gert Tinggaard Svendsen: Switch Point and First-Mover Advantage: The Case of the Wind Turbine Industry. ISSN 1397-4831.

WP 04-2