Clean or dirty energy: evidence of corruption in the renewable energy sector

Abstract

This paper studies the link between public policy and corruption for the case of wind energy. We show that publicly subsidized renewable energy can attract criminal appetites and favor the formation of criminal associations between entrepreneurs and politicians able to influence the licensing process. The insights of a simple model of political influence by interest groups are tested empirically using Italian data for the years 1990–2007. Using a difference in difference approach we quantify the impact of a Green Certificate policy aimed at supporting renewables, and find robust evidence that criminal association activity increased more in windy provinces after the introduction of the generous policy regime. The magnitude of the effect is large: the construction of an average wind park is associated with an increase in criminal activity of 6 % in the treatment compared to the control group. Our findings show that in the presence of poor institutions, even well designed market-based policies can have an adverse impact. The analysis is relevant for countries that are generally characterized by heavy bureaucracies, weak institutions and by large renewable potential.

5 Conclusions

Recent anecdotal evidence suggests the diffusion of corruption practices in the renewable energy sector. In Italy, several inquiries have looked into corrupt practices and bribes conceived with the aim of building wind farms and appropriating the associated public support. This paper has analyzed the link between public subsidies for renewable energy and the potential scope for rent seeking and corruption. To our knowledge, this is the first attempt to study whether public incentives to renewable energy resources could lead to an increase in illegal activities. This is a highly policy relevant topic since over the past years several countries implemented public support policies meant to promote renewables, which are now being evaluated.

Using a simple model of corruption, we show that in a context of weak institutions windier provinces are more likely to experience corruption, especially after the introduction of a more favorable policy regime. Moreover, the number of wind energy projects in a given province is expected to increase with the extent of corruption. We test these results using Italian data at the provincial level for the period 1990–2007, and we find strong empirical evidence that supports the theory, establishing that in the presence of poor institutions, public policy can fuel corruption. The main finding is that criminal association activity increased more in high-wind provinces and especially after the introduction of a
favorable market-based regime of public incentives.

Overall, the paper points out that even well designed policies can have an adverse impact in heavily regulated environments with poorly functioning socio-political institutions, especially in places with the highest potential for efficiency gains. The magnitude of our empirical estimates is significant: for an average wind park (of 10 MW) installed after 1999, and which receives about 1.5 Million euro per year in public support, the number of criminal association offenses has increased by 6 % in the high-wind provinces with respect to the less windy ones.32 These results draw clear normative implications, particularly for countries which are characterized by abundant renewable resources and by weak
institutions.