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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 generatorsÕ 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, International Association for Energy Economics, vol. 0(Number 3), pages 67-90.
    • Handle: RePEc:aen:journl:2008v29-03-a04
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    JEL classification:

    • F0 - International Economics - - General

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