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Inducing Clean Technology in the Electricity Sector: Tradable Permits or Carbon Tax Policies?

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  • Yihsu Chen
  • Chung-Li Tseng

Abstract

Tradable permits and carbon taxes are two market-based instruments commonly considered by policymakers to regulate pollutions. While a tax is fixed, predetermined by authorities, the uncertain permits price is driven by market dynamics, fluctuating with the prices of natural gas and electricity. Both instruments offer firms different incentives for adopting clean technologies. This paper explores the optimal investment timing when a coal-fired plant owner considers introducing clean technologies in face of these two policies using a real options approach. We find that tradable permits could effectively trigger adopting clean technologies at a considerably lower level of carbon price relative to a tax policy. Higher levels of volatility in permit prices are likely to induce suppliers to take early actions to hedge against carbon risks. Thus, offset and other price control mechanisms, which are designed to reduce permit prices or to suppress prices volatility, are likely to delay clean technology investments.

Suggested Citation

  • Yihsu Chen & Chung-Li Tseng, 2011. "Inducing Clean Technology in the Electricity Sector: Tradable Permits or Carbon Tax Policies?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 169-174.
  • Handle: RePEc:aen:journl:32-3-a06
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    Citations

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    Cited by:

    1. Simon Quemin, 2016. "Intertemporal abatement decisions under ambiguity aversion in a cap and trade," Working Papers 1604, Chaire Economie du climat.
    2. Brauneis, Alexander & Mestel, Roland & Palan, Stefan, 2013. "Inducing low-carbon investment in the electric power industry through a price floor for emissions trading," Energy Policy, Elsevier, vol. 53(C), pages 190-204.
    3. Federico Boffa & Stefano Clò & Alessio D'Amato, 2013. "Environmental policy and incentives to adopt abatement technologies under endogenous uncertainty," Working Papers 5, Department of the Treasury, Ministry of the Economy and of Finance.
    4. Fan, Jin & He, Haonan & Wu, Yanrui, 2016. "Personal carbon trading and subsidies for hybrid electric vehicles," Economic Modelling, Elsevier, vol. 59(C), pages 164-173.
    5. Xu, Li & Deng, Shi-Jie & Thomas, Valerie M., 2016. "Carbon emission permit price volatility reduction through financial options," Energy Economics, Elsevier, vol. 53(C), pages 248-260.
    6. Bukvić, Rajko, 2015. "Рыночные Механизмы Сокращения Выбросов Парниковых Газов И Активности И Перспективы России
      [Market mechanisms of reduction of greenhouse gases emissions and actions and perspectives of Russia]
      ," MPRA Paper 71616, University Library of Munich, Germany, revised 2015.
    7. McKibbin, Warwick J. & Morris, Adele C. & Wilcoxen, Peter J., 2014. "Pricing carbon in the U.S.: A model-based analysis of power-sector-only approaches," Resource and Energy Economics, Elsevier, vol. 36(1), pages 130-150.
    8. Cyril Monnet & Ted Temzelides, 2016. "Monetary emissions trading mechanisms," International Journal of Economic Theory, The International Society for Economic Theory, vol. 12(1), pages 85-100, March.
    9. Li, Yihua & Tseng, Chung-Li & Hu, Guiping, 2015. "Is now a good time for Iowa to invest in cellulosic biofuels? A real options approach considering construction lead times," International Journal of Production Economics, Elsevier, vol. 167(C), pages 97-107.
    10. Silvia Albrizio & Helia Costa, 2012. "Policy Uncertainty and Investment in Low-Carbon Technology," Economics Working Papers ECO2012/27, European University Institute.
    11. Bukvić, Rajko, 2017. "Ефекат Стакленика, Глобално Загревање И Кјотски Протокол
      [Greenhouse Effect, Global Warming and Kyoto Protocol]
      ," MPRA Paper 83953, University Library of Munich, Germany, revised 2017.
    12. Chiu, Fan-Ping & Kuo, Hsiao-I. & Chen, Chi-Chung & Hsu, Chia-Sheng, 2015. "The energy price equivalence of carbon taxes and emissions trading—Theory and evidence," Applied Energy, Elsevier, vol. 160(C), pages 164-171.
    13. repec:aen:journl:ej38-si1-argentiero is not listed on IDEAS
    14. Bukvić, Rajko & Petrović, Dragan, 2017. "Парниковый Эффект И Рыночные Механизмы Киотского Протокола
      [Greenhouse Effect and Mechanisms of Kyoto Protocol]
      ," MPRA Paper 76451, University Library of Munich, Germany, revised 2017.

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    JEL classification:

    • F0 - International Economics - - General

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