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Energies 2012, 5(10), 4165-4185; doi:10.3390/en5104165

Short Term Electric Production Technology Switching Under Carbon Cap and Trade

1,*  and 2
1 Department of Economics and Finance, University of Wyoming, 1000 University Ave, Laramie, WY 82072, USA 2 The Development Research Group, World Bank, 1818 H St., N.W., Washington, DC 20433, USA
* Author to whom correspondence should be addressed.
Received: 1 September 2012 / Revised: 24 September 2012 / Accepted: 10 October 2012 / Published: 23 October 2012
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This study examines fuel switching in electricity production following the introduction of the European Union’s Emissions Trading System (EU ETS) for greenhouse gas emissions. A short-run restricted cost equation is estimated with carbon permits, high-carbon fuels, and low carbon fuels as variable inputs. Shadow values and substitution elasticities for carbon-free energy resources from nuclear, hydroelectric and renewable sources are imputed from the cost equation. The empirical analysis examines 12 European countries using monthly data on fuel use, prices, and electricity generation during the first phase of the European Emissions Trading System. Despite low emission permit prices, this study finds statistically significant substitution between fossil fuels and carbon free sources of energy for electric power production. Significant substitution between fossil fuels and nuclear energy also was found. Still, while 18 of the 20 substitution elasticities are statistically significant, they are all less than unity, consistent with limited substitution. Overall, these results suggest that prices for carbon emission permits relative to prices for carbon and carbon free sources of energy do matter but that electric power producers have limited operational flexibility in the short-run to satisfy greenhouse gas emission limits.
Keywords: electricity; EU ETS; technology; switching; carbon; trading electricity; EU ETS; technology; switching; carbon; trading
This is an open access article distributed under the Creative Commons Attribution License (CC BY) which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

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Considine, T.; Larson, D.F. Short Term Electric Production Technology Switching Under Carbon Cap and Trade. Energies 2012, 5, 4165-4185.

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