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Economics of Pricing the Cost of Carbon Dioxide Restrictions in the Production of Electricity

Abstract:
We calculate the cost of a carbon dioxide constraint in the production of electricity by modeling the replacement of coal generators with natural gas generators. We find: First, replacing coal generators with natural gas generators is the most economical way to reduce carbon dioxide emissions by 20 percent. Second, replacing existing coal generation capacity with modern coal generation plants can only reduce total carbon dioxide by 5 percent. Third, the distribution of the efficiency of coal generators in the United States restricts the range over which carbon dioxide prices effectively manage the displacement of coal by gas. Fourth, the narrow range for the price of carbon dioxide creates the possibility that a market in carbon dioxide permits will result in high volatility in the market for electricity. Fifth, the carbon prices implied by the transition from coal to gas will have very little impact on transportation fuels.

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

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

Keywords: Price of carbon dioxide, coal, gas, electrical generators, global warming, Cap and trade

DOI: 10.5547/ISSN0195-6574-EJ-Vol32-No4-2


Published in Volume 32, Number 4 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.