How Policy Design Determines Renewable Energy in the US and EU — a research paper written for Ngina Chiteji's Transfer Student Research Seminar at NYU Gallatin, published in Confluence.
Over the past several decades, renewable energy has moved from a marginal policy concern to a central issue in economic analysis. Technologies such as solar and wind, once dismissed as too expensive and technologically un-advanced, have experienced dramatic cost declines and rapid diffusion. In many electricity markets, renewable energy is now cost-competitive with fossil fuels, fundamentally changing the economics of energy production.
Despite this global technological progress, renewable energy deployment has followed very different trajectories across advanced economies. The contrast between the United States and the European Union is particularly striking. Both regions operate under similar cost conditions and have access to the same global technologies, yet the European Union has consistently deployed renewable energy more quickly and more evenly than the United States.
The divergence is driven less by technology or cost and more by institutional design.
This divergence motivates the central research question of this paper: How do differences in policy design and market structure between the United States and the European Union shape renewable energy deployment, and what can each region learn from the other? While falling renewable energy costs create the opportunity for expansion, deployment outcomes depend on whether policies are stable, credible, and coordinated over time. In the European Union, long-term and legally anchored policy frameworks have translated declining costs into sustained market expansion. In contrast, the United States's decentralized governance structure and reliance on politically contingent, tax-based incentives have produced more uneven investment responses.
The roots: how the 1970s shaped two paths
The different paths renewable energy has taken in the United States and the European Union can be traced back to how each region first responded to energy insecurity in the 1970s. The oil shocks exposed the economic risks of heavy reliance on imported fossil fuels and forced governments to think more seriously about the structure of their energy systems. As Daniel Yergin shows in his account of modern energy history, shared energy crises often lead to very different national responses depending on political institutions and strategic priorities.
In Europe, the oil shocks triggered a shift toward diversification and long-term planning. Countries such as Germany and Denmark began investing early in alternative energy sources — Denmark in wind power, Germany in solar research — not primarily for environmental reasons, but to improve energy security and price stability. Over time, this approach became embedded in European energy governance: a collective project, supported by shared rules, coordinated targets, and long-term commitments.
The United States followed a different trajectory. Energy governance remained highly decentralized, with substantial authority at the state level and limited federal coordination. At the federal level, support relied largely on tax-based mechanisms — the Investment Tax Credit and the Production Tax Credit — that were frequently revised or allowed to expire, tying renewable energy policy closely to electoral cycles and increasing uncertainty for long-term investment.
The American model: boom and bust
Renewable energy policy in the United States has developed without a stable, long-term national framework. Because solar projects require large upfront capital investments with long payback periods, uncertainty over future policy support significantly constrains sustained deployment. The International Energy Agency reports that the United States added approximately 32 GW of solar photovoltaic capacity in 2023 — a 70 percent increase over 2022 following the expansion of credits under the Inflation Reduction Act. While impressive, this growth is policy-driven rather than institutionally secured: future outcomes remain closely tied to continued political support.
The European model: stability as policy
Renewable energy policy in the European Union is structured around long-term, coordinated rules rather than short-term political incentives. The revised Renewable Energy Directive establishes a binding EU-wide renewable energy target of 42.5 percent by 2030, with an ambition to reach 45 percent. Because these commitments are embedded in EU law, they are less vulnerable to electoral cycles and national political shifts, reducing regulatory uncertainty and lowering the cost of capital for renewable projects.
Reflecting these frameworks, the IEA reports that the European Union added approximately 61 GW of solar photovoltaic capacity in 2023 — a 45 percent increase over 2022, with REPowerEU-related policies as key drivers of continued investment.
The household lens
At the household level, the institutional features of the US system translate into uneven solar adoption outcomes. Because electricity regulation and incentive design are largely determined at the state level, household decisions depend heavily on local policy stability rather than national conditions. States such as California, New Jersey, and Massachusetts — where renewable portfolio standards, net metering, and permitting rules have been relatively stable — have experienced significant growth in residential solar. States with weaker incentives have lagged behind, despite having comparable solar potential.
In the European Union, household adoption has followed a more coordinated path. Feed-in tariff systems guaranteed households a fixed price for electricity generated from rooftop solar over fifteen to twenty years. These long-term guarantees substantially reduced financial risk and encouraged widespread participation. Stable policy environments allowed banks to offer standardized, low-interest green loans for residential solar installations.
Falling solar module prices create favorable market conditions, but they do not automatically produce uniform deployment outcomes.
What economic theory tells us
Renewable energy markets generate significant positive externalities. Solar energy reduces emissions and local pollution, creating benefits that are not fully captured by private investors. Climate stability and a low-carbon energy system also have public good characteristics: they are non-excludable and shared by all. Because individual actors cannot capture the full benefits of these outcomes, households and firms underinvest. Stable policy frameworks help align private incentives with collective goals.
Taken together, economic theory shows that declining renewable energy costs are necessary but not sufficient for widespread adoption. Externalities, public goods, market structure, and — most importantly — policy credibility determine whether cost reductions translate into large-scale deployment.
What each side can learn
The US and EU experiences show that neither policy model is complete on its own. The United States can learn from the EU's use of binding, long-term frameworks that reduce uncertainty and allow private actors to plan beyond electoral cycles. The European Union can learn from the US approach to flexibility and experimentation, particularly in the use of market-based incentives to respond quickly to changing conditions. A combination of the EU's institutional stability and the US's capacity to adjust policy tools as markets evolve would better support renewable energy deployment as systems become more complex.
Differences in renewable energy deployment between the United States and the European Union are not explained by technology or declining solar costs, but by policy design and institutional structure. Where renewable energy policy is stable, coordinated, and insulated from short-term political shifts, falling costs translate into sustained deployment. Where support is fragmented or politically contingent, deployment remains uneven despite favorable market conditions. As renewable technologies mature, the key constraint is no longer affordability, but the capacity of institutions to support renewable energy deployment over time.
Read the full paper on Confluence ↗