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Pricing Carbon For Electricity Generation: National And International Dimensions

Author

Listed:
  • Grubb, M.
  • Newbery, N.

Abstract

In this paper, which forms a chapter in the forthcoming Book “Delivering a Low Carbon Electricity System: Technologies, Economics and Policy”2, Grubb and Newbery examine how carbon for electricity generation should be priced. They begin by suggesting that it is not clear what the correct price of carbon is, but that it spans the whole range of economically plausible prices. They then go on to discuss the theoretical merits of taxes versus quotas, concluding that theoretically a stable tax would best reflect the true social cost of emissions, which should not change with market conditions. They then go to evaluate the EU Emissions Trading Scheme where allowances for the emission of CO2 are traded (EUAs). The price signals offered by the scheme in its first trading period have been very unsatisfactory with high variability and the price trending down towards very low levels as it has become clear that governments were much too generous in their initial allocation of quotas. What is needed is a stable investment environment for low carbon generation investments. They discuss a number of policy options to achieve this: long period commitments on quotas; allowing unconstrained banking and borrowing of EUAs over multiple periods; long term price declarations to be used in allocation auctions; government issued contracts for differences on the future carbon price; or simply to issue low-carbon electricity contracts. The authors conclude with a discussion of the scope for international agreements on carbon emissions reduction. They conclude that imperfect though it is the EU ETS is a good place to start to link up emerging trading regimes, and that quota systems have more of a chance of commanding international agreement at least initially. However any international climate change agreement will be difficult to establish.

Suggested Citation

  • Grubb, M. & Newbery, N., 2007. "Pricing Carbon For Electricity Generation: National And International Dimensions," Cambridge Working Papers in Economics 0751, Faculty of Economics, University of Cambridge.
  • Handle: RePEc:cam:camdae:0751
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    File URL: http://www.electricitypolicy.org.uk/pubs/wp/eprg0722.pdf
    File Function: Working Paper Version
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    Citations

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    Cited by:

    1. Yeh, Sonia & Witcover, Julie & Lade, Gabriel E. & Sperling, Daniel, 2016. "A review of low carbon fuel policies: Principles, program status and future directions," Energy Policy, Elsevier, vol. 97(C), pages 220-234.
    2. repec:dau:papers:123456789/13147 is not listed on IDEAS
    3. Fagiani, Riccardo & Richstein, Jörn C. & Hakvoort, Rudi & De Vries, Laurens, 2014. "The dynamic impact of carbon reduction and renewable support policies on the electricity sector," Utilities Policy, Elsevier, vol. 28(C), pages 28-41.
    4. Dominique Finon & Fabien Roques, 2013. "European Electricity Market Reforms: The "Visible Hand" of Public Coordination," Economics of Energy & Environmental Policy, International Association for Energy Economics, vol. 0(Number 2).

    More about this item

    Keywords

    Carbon price; electricity; taxes vs quotas; emissions trading.;

    JEL classification:

    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
    • Q55 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Technological Innovation

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