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Carbon Tax or Carbon Permits: The Impact on Generators' Risks

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Author Info
Richard Green

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Abstract

Volatile fuel prices affect both the cost and price of electricity in a liberalised market. Generators with the price-setting technology will face less risk to their profit margins than those with a technology that is not price-setting, even if its costs are not volatile. Emissions permit prices may respond to relative fuel prices, further increasing volatility. This paper simulates the impact of this on generators' 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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Publisher Info
Paper provided by Department of Economics, University of Birmingham in its series Discussion Papers with number 07-02.

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Length: 18 pages
Date of creation: Mar 2007
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Handle: RePEc:bir:birmec:07-02

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Postal: Edgbaston, Birmingham, B15 2TT
Web page: http://www.economics.bham.ac.uk
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Related research
Keywords: Electricity; emissions trading; emissions taxes; fuel price risk;

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Find related papers by JEL classification:
L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

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  1. Richard Green & Nicholas Vasilakos, . "Market Behaviour with Large Amounts of Intermittent Generation," Discussion Papers 08-08, Department of Economics, University of Birmingham. [Downloadable!]
  2. Baldursson, Fridrik M. & von der Fehr, Nils-Henrik M., 2009. "Price volatility and risk exposure: on the interaction of quota and product markets," MPRA Paper 14994, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  3. 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. [Downloadable!]
    Other versions:
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This page was last updated on 2009-11-19.

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