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The Impact of Climate Policies on the Operation of a Thermal Power Plant


  • Orvika Rosnes


Climate policy measures aimed at power markets influence the cost structure of producers and price patterns, and are therefore likely to influence the production decision of power plants, even in the short run. When power plants have costs related to starting and stopping, decisions on short-term production are intertemporal, and the conventional Õprice vs. marginal costÕ rule is not sufficient to predict production in thermal power plants. This paper analyzes how the optimal production decision is influenced by climate policies: namely, CO2 trading mechanisms, the expansion of renewables and the interaction between these policies. The main result is that higher power price variation (as a result of increased wind power production) makes the thermal power producer less flexible, but the effect on emissions is ambiguous. A CO2 cost (as a result of an emission trading system) increases the flexibility of the producer and the operation decision resembles the conventional Ôprice vs. marginal costÕ rule more. This implies lower emissions. However, when the CO2 price is coupled with higher power price variation, the positive effects may be reversed since the two policies have opposing effects.

Suggested Citation

  • Orvika Rosnes, 2008. "The Impact of Climate Policies on the Operation of a Thermal Power Plant," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 1-22.
  • Handle: RePEc:aen:journl:2008v29-02-a01

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    References listed on IDEAS

    1. Gerking, Shelby & Stanley, Linda R, 1986. "An Economic Analysis of Air Pollution and Health: The Case of St. Louis," The Review of Economics and Statistics, MIT Press, vol. 68(1), pages 115-121, February.
    2. Williams, Roberton III, 2002. "Environmental Tax Interactions when Pollution Affects Health or Productivity," Journal of Environmental Economics and Management, Elsevier, vol. 44(2), pages 261-270, September.
    3. Jesse Schwartz & Robert Repetto, 2000. "Nonseparable Utility and the Double Dividend Debate: Reconsidering the Tax-Interaction Effect," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 15(2), pages 149-157, February.
    4. Mayeres, Inge & Proost, Stef, 1997. " Optimal Tax and Public Investment Rules for Congestion Type of Externalities," Scandinavian Journal of Economics, Wiley Blackwell, vol. 99(2), pages 261-279, June.
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    Cited by:

    1. repec:eee:energy:v:140:y:2017:i:p1:p:318-329 is not listed on IDEAS
    2. Førsund, Finn R., 2009. "Energy in a Bathtub: Electricity Trade between Countries with Different Generation Technologies," Memorandum 17/2009, Oslo University, Department of Economics.
    3. Orvika Rosnes, 2014. "Subsidies for renewable energy in inflexible power markets," Journal of Regulatory Economics, Springer, vol. 46(3), pages 318-343, December.

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    JEL classification:

    • F0 - International Economics - - General


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