Green policy and corruption

Massimo Tavoni, Caterina Gennaioli 12 July 2012

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In many countries public support policies have been implemented over the past several years with the aim of promoting renewable energy, energy efficiency, and the transition to a low-carbon economy. At the international level, emission permit trading and dedicated funds have been used to help developing countries finance the transition to a low-carbon economy, often through new and untested financial markets and mechanisms, in countries characterised by abundant renewable resources and weak institutions (Victor 2011).

Though the promotion of alternative energy is an important step to combat global warming, it is natural to wonder whether large public support schemes can have adverse effects and be conducive to corruption practices and rent seeking behaviour. Indeed, anecdotal evidence in Europe and elsewhere reports the diffusion of bribery in the renewable energy sector in the past few years. For example, several official inquiries made by the Italian police have led to the arrest of managers and local politicians who allegedly used bribes in order to obtain licenses to build wind farms. Similar scandals have surfaced in Romania, Bulgaria and Spain.

A ‘renewable energy curse’

There is an exhaustive academic literature arguing that resource abundance can increase rent seeking (Tornell et al. 1999, Baland et al. 2000), have adverse effects on corruption and the quality of politicians (Brollo et al. 2010, Vincente 2010) and be detrimental to economic growth via an adverse effect on institutional quality (Mauro 1995, Leite et al. 1999, Sachs et al. 1995, Sala-i-Martin et al. 2003). In a recent study (Gennaioli and Tavoni 2011), we provide a theoretical and an empirical assessment of what we call a ‘renewable energy curse’, analysing the link between wind energy and corruption. The main question we address in the paper is whether an increase in the expected returns of investments in wind energy, following the introduction of the new policy regime based on a green certificate system, has driven economic agents, namely bureaucrats and entrepreneurs, to engage more in rent seeking activities.

We use a model of political influence in which entrepreneurs decide whether to enter the wind energy sector and pay a bribe to the local bureaucrat in exchange for a permit to build the wind farm. On the other hand the politician decides whether to accept the bribe and favour the entrepreneur during the authorisation process. This simple set up allows us to derive predictions about the equilibrium level of corruption, as a function of windiness and quality of institutions (e.g. law enforcement, social capital), and on the number of entrepreneurs operating in the wind energy sector. Our main result indicates that in the presence of poorly functioning institutions corruption can increase in the wind potential. The intuition is very simple; a high level of wind, ensuring high returns of the wind farm investment, leads economic agents to enter the wind energy market. Whether this translates into an increase of bribing practices depends on institutional quality. As a result, the introduction of a more favourable policy regime increases the extent of corruption, and it does so especially in high-wind provinces.

But what happens to the expansion of the wind energy sector when bad institutions are in place? We find a complementarity between the level of wind and corruption. In particular, comparing provinces with the same level of wind, the number of wind energy projects actually implemented at a certain period increases with the level of corruption in the previous period. And this relation becomes stronger among provinces with a high wind level. This result points out that in the presence of weak institutions, corruption becomes a crucial force behind the deployment of the wind energy sector.

This simple theory seems to be backed up by our empirical findings. Our dataset comprises a 17-year period, covering the 34 provinces of the centre-south of Italy, where most of the country's wind energy potential is located. The data include information on the official number of offences reported by the Italian Police Force for criminal association activity, one of the crimes for which individuals involved in wind energy scandals have been commonly prosecuted. It also includes detailed wind resource potential as well as the number and size of wind parks in all provinces.

To evaluate the effect of the green certificate system on the level of corruption, we use a ‘difference in difference’ strategy, comparing high-wind provinces (the treatment group) to the neighboring provinces (control group). The main result we find is that criminal association activity increases more in high-wind provinces and especially after the introduction of a more favourable policy regime based on the tradeable green certificate system set up at the end of the 1990s. Figure 1 below clearly indicates that the gap in criminal association activity between the two groups begins to shrink in the last part of 1990s, with an acceleration in 2001, the year of actual implementation of the green certificate system. The extent of corruption of the high-wind and neighbouring provinces converges over time, with high-wind provinces becoming more corrupt over time and eventually equalising the neighbouring ones in 2004 (the drop in the last years is due to a change in the definition of the crimes).

Figure 1. Criminal association activity in the high-wind provinces (‘treatment group’) and in the neighbouring provinces (‘control group’) from 1990 to 2007.

Of course, it is entirely possible that the trend observed in criminal association and documented in Figure 1 has nothing to do with wind energy and is due to a general spread in crime rates in the treated provinces. To rule out this explanation we also study the trend in the index of violent crime, which includes a broad range of criminal offences. Figure 2 shows the average violent crime activity in the treated and in control provinces and we don’t see any catch up taking place between the two groups – the more ‘violent’ non-windy provinces remain in the lead over the whole two decades of the analysis. Additional robustness analysis further corroborates these findings.

Figure 2. Violent crime in the high-wind provinces (‘treatment group’) and in the neighbouring provinces (‘control group’) from 1990 to 2007.

The second main issue we analyse relates to the main drivers of the development of the wind power sector. We find that both the wind level as well as the quality of political institutions, through their effect on criminal association, has driven the actual expansion of the wind energy sector. That is to say, there is a positive and significant correlation between the level of corruption, and the development of wind project, and this relation is stronger after the introduction of a more favourable policy regime and among the windiest provinces. This result is consistent with the mechanism emphasised above, namely that in provices where politicians and entrepreneurs ‘organised’ better and were able to appropriate the associated public support, the expansion of the sector has been higher.

Though these results should be taken cautiously, since more analysis is warranted in similar sectors in order to substantiate the validity of the phenomenon, the analysis provides innovative and potentially relevant insights. In particular, it highlights that where sociopolitical institutions are functioning poorly, public support schemes – even ones which use markets to achieve efficiency – can have an adverse impact. And that such impacts would be felt especially in those places that have the highest potential. Since several countries and regions are characterised by both abundant renewable resources and weak institutions, these results suggest that an appropriate institutional setting and monitoring and verification should accompany the promotion of new energy technologies. Only by doing so will we be able to deliver clean energy and reduce greenhouse gas emissions without creating or further exarcerbating corruption.

References

Brollo, F, T Nannicini, R Perotti and G Tabellini (2010) “The Political Resource Curse”, CEPR Discussion Paper 7672.

Dal Bò, E, P Dal Bò, and R Di Tella (2006), “Plata o Plomo? Bribe and Punishment in a Theory of Political Influence”, American Political Science Review, 100(1):41-53.

Gennaioli, C and M Onorato (2010), “Public Spending and Organized Crime: the Case of the 1997 Umbria and Marche Earthquake”, Unpublished.

Gennaioli, C and M Tavoni (2011), “Clean or ‘Dirty’ Energy; Evidence on a Renewable Energy Resource Curse”, FEEM working paper.

Haber, S and V Menaldo (2011), “Do Natural Resources Fuel Authoritarianism? A Reappraisal of the Resource Curse”, American Political Science Review, 1-26:2011.

Hessami, Z (2010), "Corruption and the Composition of Public Expenditures: Evidence from OECD Countries", Munich Personal RePEc Archive.

Isham, J and L Pritchett, M Woolcock, and G Busby (2003), “The Varieties of the Resource Experience: How Natural Resource Export Structures Affect the Political Economy of Economic Growth”, mimeo, World Bank.

Lapatinas, A, A Litina, and E Sartzetakis (2011), "Corruption and Environmental Policy: An Alternative Perspective", FEEM Working Papers Series, Issue 5.

Mehlum, H, KO Moene, and R Torvik (2006), “Institutions and the resource curse”, Economic Journal, 116(5):1-20.

Sala-i-Martin, X and A Subramanian (2003), "Addressing the Natural Resource Curse: An Illustration from Nigeria", IMF Working Paper 03/139.

Tornell, A and P Lane (1999), "The voracity effect", American Economic Review, 89:22-46.

Victor, D (2011), Global warming gridlock, Cambridge University Press.

Vincente, P (2010), "Does Oil Corrupt? Evidence from a Natural Experiment in West Africa", Journal of Development Economics.

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Topics:  Environment Politics and economics

Tags:  Italy, Corruption, green policy