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Quantifying the effects of uncertain climate and environmental policies on investments and carbon emissions: A case study of Chile

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  • Bergen, Matías
  • Muñoz, Francisco D.

Abstract

In this article we quantify the effect of uncertainty of climate and environmental policies on transmission and generation investments, as well as on CO2 emissions in Chile. We use a two-stage stochastic planning model with recourse or corrective investment options to find optimal portfolios of infrastructure both under perfect information and uncertainty. Under a series of assumptions, this model is equivalent to the equilibrium of a much more complicated bi-level market model, where a transmission planner chooses investments first and generation firms invest afterwards. We find that optimal investment strategies present important differences depending on the policy scenario. By changing our assumption of how agents will react to this uncertainty we compute bounds on the cost that this uncertainty imposes on the system, which we estimate ranges between 3.2% and 5.7% of the minimum expected system cost of $57.6B depending on whether agents will consider or not uncertainty when choosing investments. We also find that, if agents choose investments using a stochastic planning model, uncertain climate policies can result in nearly 18% more CO2 emissions than the equilibrium levels observed under perfect information. Our results highlight the importance of credible and stable long-term regulations for investors in the electric power industry if the goal is to achieve climate and environmental targets in the most cost-effective manner and to minimize the risk of asset stranding.

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  • Bergen, Matías & Muñoz, Francisco D., 2018. "Quantifying the effects of uncertain climate and environmental policies on investments and carbon emissions: A case study of Chile," Energy Economics, Elsevier, vol. 75(C), pages 261-273.
  • Handle: RePEc:eee:eneeco:v:75:y:2018:i:c:p:261-273
    DOI: 10.1016/j.eneco.2018.08.014
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    Cited by:

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    4. Frédéric Babonneau & Javiera Barrera & Javiera Toledo, 2021. "Decarbonizing the Chilean Electric Power System: A Prospective Analysis of Alternative Carbon Emissions Policies," Energies, MDPI, Open Access Journal, vol. 14(16), pages 1-16, August.
    5. Yang, Zhenbing & Shao, Shuai & Yang, Lili, 2021. "Unintended consequences of carbon regulation on the performance of SOEs in China: The role of technical efficiency," Energy Economics, Elsevier, vol. 94(C).
    6. Fernández, Mauricio & Muñoz, Francisco D. & Moreno, Rodrigo, 2020. "Analysis of imperfect competition in natural gas supply contracts for electric power generation: A closed-loop approach," Energy Economics, Elsevier, vol. 87(C).
    7. Luiza Ossowska & Dorota Janiszewska & Natalia Bartkowiak-Bakun & Grzegorz Kwiatkowski, 2020. "Energy Consumption Versus Greenhouse Gas Emissions in EU," European Research Studies Journal, European Research Studies Journal, vol. 0(3), pages 185-198.

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    More about this item

    Keywords

    Uncertainty; Climate policies; Transmission and generation planning; Carbon emissions; Stochastic programming; Equilibrium;
    All these keywords.

    JEL classification:

    • N76 - Economic History - - Economic History: Transport, International and Domestic Trade, Energy, and Other Services - - - Latin America; Caribbean
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General

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