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Incentives of carbon dioxide regulation for investment in low-carbon electricity technologies in Texas

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  • Castillo, Anya
  • Linn, Joshua

Abstract

This paper compares the incentives a carbon dioxide emissions price creates for investment in low carbon dioxide-emitting technologies in the electricity sector. We consider the extent to which operational differences across generation technologies - particularly, nuclear, wind and solar photovoltaic - create differences in the incentives for new investment, which is measured by the operating profits of a potential entrant. First, astylized model of an electricity system demonstrates that the composition of the existing generation system may cause electricity prices to increase by different amounts over time when a carbon dioxide price is imposed. Differences in operation across technologies therefore translate to differences in the operating profits of a potential entrant. Then, a detailed simulation model is used to consider a hypothetical carbon dioxide price of $10-$50 per metric ton for the Electric Reliability Council of Texas (ERCOT) market. The simulations show that, for the range of prices considered, the increase in electricity prices is positively correlated with output from a typical wind unit, but the correlation is much weaker for nuclear and photovoltaic. Consequently, a carbon dioxide price creates much stronger investment incentives for wind than for nuclear or photovoltaic technologies in the Texas market.

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Bibliographic Info

Article provided by Elsevier in its journal Energy Policy.

Volume (Year): 39 (2011)
Issue (Month): 3 (March)
Pages: 1831-1844

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Handle: RePEc:eee:enepol:v:39:y:2011:i:3:p:1831-1844

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Web page: http://www.elsevier.com/locate/enpol

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Keywords: Electricity Investment Carbon price;

References

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  1. Joshua Linn, 2008. "Technological Modifications in the Nitrogen Oxides Tradable Permit Program," The Energy Journal, International Association for Energy Economics, International Association for Energy Economics, vol. 0(Number 3), pages 153-176.
  2. Fischer, Carolyn & Parry, Ian W. H. & Pizer, William A., 2003. "Instrument choice for environmental protection when technological innovation is endogenous," Journal of Environmental Economics and Management, Elsevier, vol. 45(3), pages 523-545, May.
  3. Curtis Carlson & Dallas Burtraw & Maureen Cropper & Karen L. Palmer, 2000. "Sulfur Dioxide Control by Electric Utilities: What Are the Gains from Trade?," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 108(6), pages 1292-1326, December.
  4. Fischer, Carolyn & Fox, Alan, 2004. "Output-Based Allocations of Emissions Permits: Efficiency and Distributional Effects in a General Equilibrium Setting with Taxes and Trade," Discussion Papers, Resources For the Future dp-04-37, Resources For the Future.
  5. Weber, T.A. & Neuhoff, K., 2009. "Carbon Markets and Technological Innovation," Cambridge Working Papers in Economics 0932, Faculty of Economics, University of Cambridge.
  6. Jung, Chulho & Krutilla, Kerry & Boyd, Roy, 1996. "Incentives for Advanced Pollution Abatement Technology at the Industry Level: An Evaluation of Policy Alternatives," Journal of Environmental Economics and Management, Elsevier, vol. 30(1), pages 95-111, January.
  7. David Popp, 2003. "Pollution control innovations and the Clean Air Act of 1990," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 22(4), pages 641-660.
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Cited by:
  1. Fell, Harrison & Linn, Joshua, 2013. "Renewable electricity policies, heterogeneity, and cost effectiveness," Journal of Environmental Economics and Management, Elsevier, vol. 66(3), pages 688-707.
  2. Knizley, Alta A. & Mago, Pedro J. & Smith, Amanda D., 2014. "Evaluation of the performance of combined cooling, heating, and power systems with dual power generation units," Energy Policy, Elsevier, Elsevier, vol. 66(C), pages 654-665.

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