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

Author

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  • Richard Green

Abstract

Volatile fuel prices affect both the cost and price of electricity in a liberalised market. Generators with the price-setting technology will face less risk to their profit margins than those with a technology that is not price-setting, even if its 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

Suggested Citation

  • Richard Green, 2007. "Carbon Tax or Carbon Permits: The Impact on Generators' Risks," Discussion Papers 07-02, Department of Economics, University of Birmingham.
    • Handle: RePEc:bir:birmec:07-02
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    File URL: https://repec.cal.bham.ac.uk/pdf/07-02.pdf
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    Citations

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    Cited by:

    1. Lappi, Pauli & Ollikka, Kimmo & Ollikainen, Markku, 2010. "Optimal fuel-mix in CHP plants under a stochastic permit price: Risk-neutrality versus risk-aversion," Energy Policy, Elsevier, vol. 38(2), pages 1079-1086, February.
    2. Green, Richard & Vasilakos, Nicholas, 2010. "Market behaviour with large amounts of intermittent generation," Energy Policy, Elsevier, vol. 38(7), pages 3211-3220, July.
    3. Roques, Fabien A., 2008. "Technology choices for new entrants in liberalized markets: The value of operating flexibility and contractual arrangements," Utilities Policy, Elsevier, vol. 16(4), pages 245-253, December.
    4. Roques, Fabien A. & Newbery, David M. & Nuttall, William J., 2008. "Fuel mix diversification incentives in liberalized electricity markets: A Mean-Variance Portfolio theory approach," Energy Economics, Elsevier, vol. 30(4), pages 1831-1849, July.
    5. Willems, Bert & Morbee, Joris, 2010. "Market completeness: How options affect hedging and investments in the electricity sector," Energy Economics, Elsevier, vol. 32(4), pages 786-795, July.

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    JEL classification:

    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

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