Energy policy and the power sector in the long run

This paper simulates the distributional consequences of alternative carbon emission reduction policies on power producers. To that end we propose a simple partial equilibrium model in which power generation takes place at technologyspecific sites which can differ in productivity. We calibrate the model with six technologies. Hydro, wind and solar generation feature site-specific productivity, and combine capital and sites to produce power. The productivity of coal, gas and nuclear generation is constant across sites. We use the calibrated model to analyse effects of alternative tax and subsidy schemes which imply the same reduction in carbon emissions. A carbon tax outperforms all other instruments and does not reduce the profits of carbon-free generators. Technology-specific subsidies are more costly socially, and those directed at output, rather than inputs, imply a larger transfer from the government to the subsidy recipient. Power consumption taxes typically have very high social costs and should not be the instrument of choice to reduce emissions or to finance subsidies aiming to reduce emissions.