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Short Term Electric Production Technology Switching Under Carbon Cap and Trade

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Author Info

  • Timothy Considine

    ()
    (Department of Economics and Finance, University of Wyoming, 1000 University Ave, Laramie, WY 82072, USA)

  • Donald F. Larson

    ()
    (The Development Research Group, World Bank, 1818 H St., N.W., Washington, DC 20433, USA)

Abstract

This study examines fuel switching in electricity production following the introduction of the European Union’s Emissions Trading System (EU ETS) for greenhouse gas emissions. A short-run restricted cost equation is estimated with carbon permits, high-carbon fuels, and low carbon fuels as variable inputs. Shadow values and substitution elasticities for carbon-free energy resources from nuclear, hydroelectric and renewable sources are imputed from the cost equation. The empirical analysis examines 12 European countries using monthly data on fuel use, prices, and electricity generation during the first phase of the European Emissions Trading System. Despite low emission permit prices, this study finds statistically significant substitution between fossil fuels and carbon free sources of energy for electric power production. Significant substitution between fossil fuels and nuclear energy also was found. Still, while 18 of the 20 substitution elasticities are statistically significant, they are all less than unity, consistent with limited substitution. Overall, these results suggest that prices for carbon emission permits relative to prices for carbon and carbon free sources of energy do matter but that electric power producers have limited operational flexibility in the short-run to satisfy greenhouse gas emission limits.

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Bibliographic Info

Article provided by MDPI, Open Access Journal in its journal Energies.

Volume (Year): 5 (2012)
Issue (Month): 10 (October)
Pages: 4165-4185

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Handle: RePEc:gam:jeners:v:5:y:2012:i:10:p:4165-4185:d:20904

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Keywords: electricity; EU ETS; technology; switching; carbon; trading;

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  1. Morrison, Catherine J, 1988. "Quasi-Fixed Inputs in U.S. and Japanese Manufacturing: A Generalized Leontief Restricted Cost Function Approach," The Review of Economics and Statistics, MIT Press, MIT Press, vol. 70(2), pages 275-87, May.
  2. Considine, Timothy J. & Larson, Donald F., 2004. "The environment as a factor of production," Policy Research Working Paper Series, The World Bank 3271, The World Bank.
  3. Larson, Donald F. & Ambrosi, Philippe & Dinar, Ariel & Rahman, Shaikh Mahfuzur & Entler, Rebecca, 2008. "A Review of Carbon Market Policies and Research," International Review of Environmental and Resource Economics, now publishers, now publishers, vol. 2(3), pages 177-236, November.
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  6. Butler, Lucy & Neuhoff, Karsten, 2008. "Comparison of feed-in tariff, quota and auction mechanisms to support wind power development," Renewable Energy, Elsevier, Elsevier, vol. 33(8), pages 1854-1867.
  7. Christensen, Laurits R & Greene, William H, 1976. "Economies of Scale in U.S. Electric Power Generation," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 84(4), pages 655-76, August.
  8. Hobbs, Benjamin F., 1995. "Optimization methods for electric utility resource planning," European Journal of Operational Research, Elsevier, Elsevier, vol. 83(1), pages 1-20, May.
  9. Caves, Douglas W & Christensen, Laurits R, 1980. "Global Properties of Flexible Functional Forms," American Economic Review, American Economic Association, American Economic Association, vol. 70(3), pages 422-32, June.
  10. Atkinson, Scott E & Halvorsen, Robert, 1976. "Interfuel Substitution in Steam Electric Power Generation," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 84(5), pages 959-78, October.
  11. Halvorsen, Robert & Smith, Tim R, 1986. "Substitution Possibilities for Unpriced Natural Resources: Restricted Cost Functions for the Canadian Metal Mining Industry," The Review of Economics and Statistics, MIT Press, MIT Press, vol. 68(3), pages 398-405, August.
  12. Hoffmann, Volker H., 2007. "EU ETS and Investment Decisions:: The Case of the German Electricity Industry," European Management Journal, Elsevier, Elsevier, vol. 25(6), pages 464-474, December.
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Cited by:
  1. Larson, Donald F., 2013. "Blue water and the consequences of alternative food security policies in the Middle East and North Africa for water security," Policy Research Working Paper Series, The World Bank 6464, The World Bank.

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