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Carbon Tax or Carbon Permits: The Impact on Generators Risks

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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Energy Specializations: Electricity – Generation Technologies; Electricity – Policy and Regulation; Energy and the Environment – Climate Change and Greenhouse Gases; Energy and the Environment – Policy and Regulation

JEL Codes:
Q2 -
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General
Q54 - Climate; Natural Disasters and Their Management; Global Warming

Keywords: Electricity generation, emissions trading, emission taxes, fuel price risk, UK

DOI: 10.5547/ISSN0195-6574-EJ-Vol29-No3-4


Published in Volume 29, Number 3 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.