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

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  • Richard Green

Abstract

Volatile fuel prices affect both the cost and price of electricity in a liberalized market. Generators with the price-setting technology will face less risk to their profit margins than those with costs that are not correlated with price, even if those 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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  • Richard Green, 2008. "Carbon Tax or Carbon Permits: The Impact on Generators’ Risks," The Energy Journal, , vol. 29(3), pages 67-90, July.
    • Handle: RePEc:sae:enejou:v:29:y:2008:i:3:p:67-90
    DOI: 10.5547/ISSN0195-6574-EJ-Vol29-No3-4
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    References listed on IDEAS

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    6. A. Lans Bovenberg & Lawrence H. Goulder & Derek J. Gurney, 2005. "Efficiency Costs of Meeting Industry-Distributional Constraints Under Environmental Permits and Taxes," RAND Journal of Economics, The RAND Corporation, vol. 36(4), pages 950-970, Winter.
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    Cited by:

    1. Gil Cohen & Mahmoud Qadan, 2024. "Carbon permits price and real emissions," Environment Systems and Decisions, Springer, vol. 44(4), pages 872-886, December.
    2. Xie, Chi & Cui, Zheng & Long, Daniel Zhuoyu & Qi, Jin, 2025. "Distributionally robust optimization for minimizing price fluctuations in quota system," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 193(C).

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