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The second-round effects of carbon taxes on power project finance

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Author Info

  • Paul Simshauser
  • Tim Nelson

Abstract

Purpose – The most problematic area of any carbon policy debate is the treatment of incumbent CO2 intensive coal-fired electricity generators. Policy applied to the electricity sector is rarely well guided by macroeconomic theory and modeling alone, especially in the case of carbon where the impacts are concentrated, involve a small number of firms and an essential service. The purpose of this paper is to examine the consequences of poor climate change policy development on the efficiency of capital markets within the Australian electricity sector. Design/methodology/approach – The authors conducted a survey of Australian project finance professionals to determine the risk profiles to be applied to the electricity sector, in the event a poorly-designed climate change policy is adopted. Findings – The Australian case study finds that if zero compensation results in the financial distress of project financed coal generators, finance costs for all plant rises, including new gas and renewables, leading to unnecessary increases in electricity prices. Accordingly, an unambiguous case for providing structural adjustment assistance to coal generators exists on the grounds of economic efficiency. Originality/value – Accordingly, the paper shows that an unambiguous case for providing structural adjustment assistance to coal generators exists, on the grounds of economic efficiency. JEL classification: D61, L94, L11, Q40, Q, Q4, L1, L9, D6

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Bibliographic Info

Article provided by Emerald Group Publishing in its journal Journal of Financial Economic Policy.

Volume (Year): 4 (2012)
Issue (Month): 2 (June)
Pages: 104-127

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Handle: RePEc:eme:jfeppp:v:4:y:2012:i:2:p:104-127

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Related research

Keywords: Australia; Carbon tax; Climate change; Coal technology; Electric power generation; Electricity industry; Electricity prices; Government policy; Project finance;

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References

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  1. Zephyr, 2010. "The city," City, Taylor & Francis Journals, vol. 14(1-2), pages 154-155, February.
  2. Paul Edward Simshauser & Phillip Wild, 2009. "The Western Australian Power Dilemma," Energy Economics and Management Group Working Papers 2-2009, School of Economics, University of Queensland, Australia.
  3. Paul Simshauser, 2011. "The Hidden Costs of Wind Generation in a Thermal Power System: What Cost?," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 44(3), pages 269-292, 09.
  4. Simshauser, Paul, 2009. "On Emissions Trading, Toxic Debt and the Australian Power Market," The Electricity Journal, Elsevier, vol. 22(2), pages 9-29, March.
  5. Simshauser, Paul, 2010. "Resource Adequacy, Capital Adequacy and Investment Uncertainty in the Australian Power Market," The Electricity Journal, Elsevier, vol. 23(1), pages 67-84, January.
  6. Paul Simshauser & Thao Doan, 2009. "Emissions Trading, Wealth Transfers and the Wounded Bull Scenario in Power Generation," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 42(1), pages 64-83, 03.
  7. Bushnell, James, 2004. "California's electricity crisis: a market apart?," Energy Policy, Elsevier, vol. 32(9), pages 1045-1052, June.
  8. Simhauser, Paul, 2005. "The Gains from the Microeconomic Reform of the Power Generation Industry in East-Coast Australia," Economic Analysis and Policy (EAP), Queensland University of Technology (QUT), School of Economics and Finance, vol. 35(1-2), pages 23-43, March/Sep.
  9. Simshauser, Paul, 2008. "On Emission Permit Auction vs. Allocation and the Structural Adjustment of Incumbent Power Generators in Australia," The Electricity Journal, Elsevier, vol. 21(10), pages 30-41, December.
  10. Simshauser, Paul & Nelson, Tim & Doan, Thao, 0. "The Boomerang Paradox, Part I: How a Nation's Wealth Is Creating Fuel Poverty," The Electricity Journal, Elsevier, vol. 24(1), pages 72-91, January.
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