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Emissions Trading, Wealth Transfers and the Wounded Bull Scenario in Power Generation

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  • Paul Simshauser
  • Thao Doan

Abstract

"Electricity generators accept that emissions trading is fundamental to meeting CO 2 reduction targets. But unless a percentage of permits are allocated, existing generators will face non-trivial wealth transfers. Seldom contemplated in academic works are the adverse economic consequences of an all-auction approach to emissions trading. Using Victoria to illustrate, we find that once CO 2 prices exceed $17.50/t, the marginal coal generator facing large wealth transfers will withhold generating capacity to raise prices and recoup stranded investments, thus becoming a 'wounded bull' in the market place. This has material welfare implications with modelling results indicate an intermediate-run 300 per cent increase in wholesale power prices." Copyright (c)2009 The University of Melbourne, Melbourne Institute of Applied Economic and Social Research.

Suggested Citation

  • 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, March.
  • Handle: RePEc:bla:ausecr:v:42:y:2009:i:1:p:64-83
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    Citations

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    Cited by:

    1. Phil Wild & William Paul Bell & John Foster, 2012. "Impact of Carbon Prices: State Production Trends, Inter-state Trade and Carbon Emission Reduction Outcomes in the NEM over the period 2007- 2009," Energy Economics and Management Group Working Papers 6-2012, School of Economics, University of Queensland, Australia.
    2. Huisman, Ronald & KiliƧ, Mehtap, 2015. "Time variation in European carbon pass-through rates in electricity futures prices," Energy Policy, Elsevier, vol. 86(C), pages 239-249.
    3. Fatemeh Nazifi, 2016. "The pass-through rates of carbon costs on to electricity prices within the Australian National Electricity Market," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 18(1), pages 41-62, January.
    4. John Freebairn, 2009. "Should Households and Businesses Receive Compensation for the Costs of Greenhouse Gas Emissions?," Department of Economics - Working Papers Series 1071, The University of Melbourne.
    5. Paul Simshauser & Phillip Wild, 2009. "The Western Australian Power Dilemma ," Australian Economic Papers, Wiley Blackwell, vol. 48(4), pages 342-369, December.
    6. Paul Simshauser & Tim Nelson, 2012. "The second-round effects of carbon taxes on power project finance," Journal of Financial Economic Policy, Emerald Group Publishing, vol. 4(2), pages 104-127, May.
    7. Fatemeh Nazifi, 2016. "The pass-through rates of carbon costs on to electricity prices within the Australian National Electricity Market," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 18(1), pages 41-62, January.
    8. Golombek, Rolf & Kittelsen, Sverre A.C. & Rosendahl, Knut Einar, 2013. "Price and welfare effects of emission quota allocation," Energy Economics, Elsevier, vol. 36(C), pages 568-580.
    9. Pawel Maryniak & Stefan Trueck & Rafal Weron, 2016. "Carbon pricing, forward risk premiums and pass-through rates in Australian electricity futures markets," HSC Research Reports HSC/16/10, Hugo Steinhaus Center, Wroclaw University of Technology.
    10. Phil Wild & William Paul Bell & John Foster, 2012. "The Impact of Carbon Pricing on Wholesale Electricity Prices, Carbon Pass-Through Rates and Retail Electricity Tariffs in Australia," Energy Economics and Management Group Working Papers 5-2012, School of Economics, University of Queensland, Australia.

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