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Carbon Tax or Carbon Permits: The Impact on Generators Risks

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  • Richard Green

Abstract

Volatile fuel prices affect both the cost and price of electricity in a liberalized market. Generators with the price-setting technology will face less risk to their profit margins than those with costs that are not correlated with price, even if those costs are not volatile. Emissions permit prices may respond to relative fuel prices, further increasing volatility. This paper simulates the impact of this on generatorsÕ profits, comparing an emissions trading scheme and a carbon tax against predictions for the UK in 2020. The carbon tax reduces the volatility faced by nuclear generators, but raises that faced by fossil fuel stations. Optimal portfolios would contain a higher proportion of nuclear plant if a carbon tax was adopted.

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Bibliographic Info

Article provided by International Association for Energy Economics in its journal The Energy Journal.

Volume (Year): Volume 29 (2008)
Issue (Month): Number 3 ()
Pages: 67-90

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Handle: RePEc:aen:journl:2008v29-03-a04

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Cited by:
  1. Roques, F.A., 2007. "Technology Choices for New Entrants in Liberalised Markets: The Value of Operating Flexibility and Contractual Arrangements," Cambridge Working Papers in Economics 0759, Faculty of Economics, University of Cambridge.
  2. Keppler, Jan Horst & Cruciani, Michel, 2010. "Rents in the European power sector due to carbon trading," Energy Policy, Elsevier, vol. 38(8), pages 4280-4290, August.
  3. Lappi, Pauli & Ollikka, Kimmo & Ollikainen, Markku, 2010. "Optimal fuel-mix in CHP plants under a stochastic permit price: Risk-neutrality versus risk-aversion," Energy Policy, Elsevier, vol. 38(2), pages 1079-1086, February.
  4. Roques, Fabien A. & Newbery, David M. & Nuttall, William J., 2008. "Fuel mix diversification incentives in liberalized electricity markets: A Mean-Variance Portfolio theory approach," Energy Economics, Elsevier, vol. 30(4), pages 1831-1849, July.
  5. Fridrik Baldursson & Nils-Henrik Fehr, 2012. "Price Volatility and Risk Exposure: On the Interaction of Quota and Product Markets," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 52(2), pages 213-233, June.
  6. McKibbin, Warwick J. & Morris, Adele C. & Wilcoxen, Peter J., 2014. "Pricing carbon in the U.S.: A model-based analysis of power-sector-only approaches," Resource and Energy Economics, Elsevier, vol. 36(1), pages 130-150.
  7. Richard Green & Nicholas Vasilakos, 2008. "Market Behaviour with Large Amounts of Intermittent Generation," Discussion Papers 08-08, Department of Economics, University of Birmingham.

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