"Electricity generators accept that emissions trading is fundamental to meeting CO2 reduction targets. But unless a percentage of permits are allocated, existing generators will face non-trivial wealth transfers. Seldom contemplated in academic works are the adverse economic consequences of an all-auction approach to emissions trading. Using Victoria to illustrate, we find that once CO2 prices exceed $17.50/t, the marginal coal generator facing large wealth transfers will withhold generating capacity to raise prices and recoup stranded investments, thus becoming a 'wounded bull' in the market place. This has material welfare implications with modelling results indicate an intermediate-run 300 per cent increase in wholesale power prices." Copyright (c)2009 The University of Melbourne, Melbourne Institute of Applied Economic and Social Research.
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Article provided by The University of Melbourne, Melbourne Institute of Applied Economic and Social Research in its journal Australian Economic Review.