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

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  • Richard Green

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.

Suggested Citation

  • Richard Green, 2008. "Carbon Tax or Carbon Permits: The Impact on Generators’ Risks," The Energy Journal, , vol. 29(3), pages 67-90, July.
    • Handle: RePEc:sae:enejou:v:29:y:2008:i:3:p:67-90
    DOI: 10.5547/ISSN0195-6574-EJ-Vol29-No3-4
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    References listed on IDEAS

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    1. Green, Richard J & Joanne Evans, 2003. "Why did British electricity prices fall after 1998?," Royal Economic Society Annual Conference 2003 92, Royal Economic Society.
    2. Green, Richard, 2002. "Retail Competition and Electricity Contracts," Royal Economic Society Annual Conference 2002 93, Royal Economic Society.
    3. A. Lans Bovenberg & Lawrence H. Goulder & Derek J. Gurney, 2005. "Efficiency Costs of Meeting Industry-Distributional Constraints Under Environmental Permits and Taxes," RAND Journal of Economics, The RAND Corporation, vol. 36(4), pages 950-970, Winter.
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