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Emissions Trading, Wealth Transfers and the Wounded Bull Scenario in Power Generation
Author(s) -
Simshauser Paul,
Doan Thao
Publication year - 2009
Publication title -
australian economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.308
H-Index - 29
eISSN - 1467-8462
pISSN - 0004-9018
DOI - 10.1111/j.1467-8462.2009.00529.x
Subject(s) - electricity , economics , welfare , generator (circuit theory) , emissions trading , electricity generation , power (physics) , marginal cost , microeconomics , business , natural resource economics , greenhouse gas , market economy , engineering , biology , ecology , physics , quantum mechanics , electrical engineering
Electricity generators accept that emissions trading is fundamental to meeting CO 2 reduction targets. But unless a percentage of permits are allocated, existing generators will face non‐trivial wealth transfers. Seldom contemplated in academic works are the adverse economic consequences of an all‐auction approach to emissions trading. Using Victoria to illustrate, we find that once CO 2 prices exceed $17.50/t, the marginal coal generator facing large wealth transfers will withhold generating capacity to raise prices and recoup stranded investments, thus becoming a ‘wounded bull’ in the market place. This has material welfare implications with modelling results indicate an intermediate‐run 300 per cent increase in wholesale power prices.