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Firing the Furnace? - An Econometric Analysis of Utilities' Fuel Choice

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  • Tauchmann, Harald

Abstract

This paper attempts to predict the potential effects of CO2 emissions trading on fuel choice in the German electric power industry. By analyzing panel data (1968-1998) of major utilities, we show that the fuel mix of electric utilities is price inelastic. As a consequence, the implementation of a CO2 trading scheme will, if anything, only slightly induce interfuel substitution. Accordingly, low-carbon fuels will hardly replace lignite and hard coal through CO2 emissions trading, as long as abatement targets are not extremely ambitious. However,one cannot rule out that fuel prices may become more important for the utilities' fuel mix as a result of deregulation in the German power sector.

Suggested Citation

  • Tauchmann, Harald, 2004. "Firing the Furnace? - An Econometric Analysis of Utilities' Fuel Choice," RWI Discussion Papers 17, RWI - Leibniz-Institut für Wirtschaftsforschung.
    • Handle: RePEc:zbw:rwidps:17
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    References listed on IDEAS

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    Cited by:

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    2. Matisoff, Daniel C. & Noonan, Douglas S. & Cui, Jinshu, 2014. "Electric utilities, fuel use, and responsiveness to fuel prices," Energy Economics, Elsevier, vol. 46(C), pages 445-452.
    3. Neuhoff, K. & Grubb, M. & Keats, K., 2005. "Impact of the allowance allocation on prices and efficiency," Cambridge Working Papers in Economics 0552, Faculty of Economics, University of Cambridge.
    4. Michelsen, Carl Christian & Madlener, Reinhard, 2016. "Switching from fossil fuel to renewables in residential heating systems: An empirical study of homeowners' decisions in Germany," Energy Policy, Elsevier, vol. 89(C), pages 95-105.
    5. Kim Keats Martinez & Karsten Neuhoff, 2005. "Allocation of carbon emission certificates in the power sector: how generators profit from grandfathered rights," Climate Policy, Taylor & Francis Journals, vol. 5(1), pages 61-78, January.
    6. Gao, Jing & Nelson, Robert & Zhang, Lei, 2013. "Substitution in the electric power industry: An interregional comparison in the eastern US," Energy Economics, Elsevier, vol. 40(C), pages 316-325.
    7. Narayan, Paresh Kumar & Popp, Stephan, 2009. "Can the electricity market be characterised by asymmetric behaviour?," Energy Policy, Elsevier, vol. 37(11), pages 4364-4372, November.
    8. Mikael Linden, Matti Makela, and Jussi Uusivuori, 2013. "Fuel Input Substitution under Tradable Carbon Permits System: Evidence from Finnish Energy Plants 2005-2008," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2).
    9. Pettersson, Fredrik & Söderholm, Patrik & Lundmark, Robert, 2012. "Fuel switching and climate and energy policies in the European power generation sector: A generalized Leontief model," Energy Economics, Elsevier, vol. 34(4), pages 1064-1073.
    10. Narayan, Paresh Kumar & Narayan, Seema & Smyth, Russell, 2008. "Are oil shocks permanent or temporary? Panel data evidence from crude oil and NGL production in 60 countries," Energy Economics, Elsevier, vol. 30(3), pages 919-936, May.
    11. Colm McCarthy & Jeremiah O'Dwyer & Richard Troy, 2006. "Measuring fuel diversity in power generation," Working Papers 200618, School of Economics, University College Dublin.

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    More about this item

    Keywords

    fuel mix; high-carbon fuels; CO2 emissions trading;
    All these keywords.

    JEL classification:

    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources
    • Q53 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling

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