Substitution and technological change under carbon cap and trade : lessons from Europe, Vol. 1 of 1

About

Countries

Data & Research

Learning

News

Projects & Operations

Publications

Topics

Home > Data & Research > Document Search > Report Details

Substitution and technological change under carbon cap and trade : lessons from Europe

Author:	Considine , Timothy J.; Larson, Donald F.;	Collection Title:	Policy Research working paper ; no. WPS 4957
Country:	Europe;	Date Stored:	2009/06/08
Document Date:	2009/06/01	Document Type:	Policy Research Working Paper
Language:	English	Region:	Europe and Central Asia
Report Number:	WPS4957	SubTopics:	Energy Production and Transportation; Environment and Energy Efficiency; Carbon Policy and Trading; Energy and Environment; Markets and Market Access
Volume No:	1 of 1

Summary: The use of carbon-intense fuels by the power sector contributes significantly to the greenhouse gas emissions of most countries. For this reason, the sector is often key to initial efforts to regulate emissions. But how long does it take before new regulatory incentives result in a switch to less carbon intense fuels? This study examines fuel switching in electricity production following the introduction of the European Unionﾒs Emissions Trading System, a cap-and-trade regulatory framework for greenhouse gas emissions. The empirical analysis examines the demand for carbon permits, carbon based fuels, and carbon-free energy for 12 European countries using monthly data on fuel use, prices, and electricity generation. A short-run restricted cost function is estimated in which carbon permits, high-carbon fuels, and low-carbon fuels are variable inputs, conditional on quasi-fixed carbon-free energy production from nuclear, hydro, and renewable energy capacity. The results indicate that prices for permits and fuels affect the composition of inputs in a statistically significant way. Even so, the analysis suggests that the industryﾒs fuel-switching capabilities are limited in the short run as is the scope for introducing new technologies. This is because of the dominant role that past irreversible investments play in determining power-generating capacity. Moreover, the results suggest that, because the capacity for fuel substitution is limited, the impact of carbon emission limits on electricity prices can be significant if fuel prices increase together with carbon permit prices. The estimates suggest that for every 10 percent rise in carbon and fuel prices, the marginal cost of electric power generation increases by 8 percent in the short run. The European experience points to the importance of starting early down a low-carbon path and of policies that introduce flexibility in how emission reductions are achieved.


Official Documents Official, scanned versions of documents (may include signatures, etc.)
File Type		Description	File Size (mb)

	PDF 40 pages	Official version*	2.8 (approx.)
	Text	Text version**

* The official version is derived from scanning the final, paper copy of the document and is the official,
archived version including all signatures, charts, etc.

** The text version is the OCR text of the final scanned version and is not an accurate representation of the final text.
It is provided solely to benefit users with slow connectivity.

Permanent URL for this page: http://go.worldbank.org/6QL18BY3F0