Substitution and Technological Change under Carbon Cap and Trade : 
Lessons from Europe

Considine, Timothy J.; Larson, Donald F.

dc.creator	Considine, Timothy J.
dc.creator	Larson, Donald F.
dc.date	2012-03-19T19:10:49Z
dc.date	2012-03-19T19:10:49Z
dc.date	2009-06-01
dc.date.accessioned	2023-02-17T21:10:07Z
dc.date.available	2023-02-17T21:10:07Z
dc.identifier	http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20090608131814
dc.identifier	http://hdl.handle.net/10986/4150
dc.identifier.uri	http://localhost:8080/xmlui/handle/CUHPOERS/245187
dc.description	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 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 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.
dc.language	English
dc.relation	Policy Research working paper ; no. WPS 4957
dc.rights	CC BY 3.0 IGO
dc.rights	http://creativecommons.org/licenses/by/3.0/igo/
dc.rights	World Bank
dc.subject	ALLOCATION OF PERMITS
dc.subject	APPROACH
dc.subject	ATMOSPHERE
dc.subject	AVAILABILITY
dc.subject	AVERAGE PRICES
dc.subject	BIOMASS
dc.subject	CARBON
dc.subject	CARBON ABATEMENT
dc.subject	CARBON CAPTURE
dc.subject	CARBON CONTENT
dc.subject	CARBON DIOXIDE
dc.subject	CARBON DIOXIDE EMISSION
dc.subject	CARBON DIOXIDE EMISSIONS
dc.subject	CARBON EMISSION
dc.subject	CARBON EMISSION FACTOR
dc.subject	CARBON EMISSION REDUCTIONS
dc.subject	CARBON EMISSIONS
dc.subject	CARBON ENERGY
dc.subject	CARBON FUELS
dc.subject	CARBON INTENSITY
dc.subject	CARBON MARKETS
dc.subject	CARBON OFFSET
dc.subject	CARBON OFFSETS
dc.subject	CARBON PATH
dc.subject	CARBON PRICE
dc.subject	CARBON PRICES
dc.subject	CARBON PRICING
dc.subject	CEMENT
dc.subject	CERTIFIED EMISSION REDUCTIONS
dc.subject	CLIMATE CHANGE
dc.subject	CLIMATE CHANGE POLICIES
dc.subject	CLIMATE POLICY
dc.subject	COAL
dc.subject	COMBUSTION
dc.subject	CONSUMPTION OF PETROLEUM
dc.subject	CYCLE GAS
dc.subject	DEMAND ELASTICITY
dc.subject	DEMAND FOR ELECTRICITY
dc.subject	DEMAND FUNCTIONS
dc.subject	ELASTICITY OF SUBSTITUTION
dc.subject	ELECTRIC POWER
dc.subject	ELECTRIC POWER GENERATION
dc.subject	ELECTRIC POWER PRODUCTION
dc.subject	ELECTRIC POWER SECTOR
dc.subject	ELECTRIC UTILITIES
dc.subject	ELECTRICITY
dc.subject	ELECTRICITY GENERATION
dc.subject	ELECTRICITY PRICES
dc.subject	ELECTRICITY PRODUCERS
dc.subject	ELECTRICITY PRODUCTION
dc.subject	EMISSION
dc.subject	EMISSION ABATEMENT
dc.subject	EMISSION CONTROLS
dc.subject	EMISSION FACTOR
dc.subject	EMISSION LIMITS
dc.subject	EMISSION PERMITS
dc.subject	EMISSION REDUCTIONS
dc.subject	EMISSION TRADING
dc.subject	EMISSIONS INCREASES
dc.subject	EMPLOYMENT
dc.subject	ENERGY MARKET
dc.subject	ENERGY MARKETS
dc.subject	ENERGY PRICES
dc.subject	ENERGY PRODUCTION
dc.subject	ENERGY RESOURCES
dc.subject	ENERGY SERVICE
dc.subject	ENERGY SOURCES
dc.subject	FACTOR PRICES
dc.subject	FERROUS METALS
dc.subject	FOSSIL
dc.subject	FOSSIL ENERGY
dc.subject	FOSSIL FUEL
dc.subject	FOSSIL FUEL CONSUMPTION
dc.subject	FOSSIL FUEL USE
dc.subject	FOSSIL FUELS
dc.subject	FREE ENERGY
dc.subject	FUEL
dc.subject	FUEL OIL
dc.subject	FUEL PRICE
dc.subject	FUEL PRICES
dc.subject	FUEL SUBSTITUTION
dc.subject	FUEL SWITCHING
dc.subject	FUEL USE
dc.subject	FUELS
dc.subject	GAS TURBINE
dc.subject	GAS TURBINE TECHNOLOGY
dc.subject	GENERATING CAPACITY
dc.subject	GENERATION CAPACITY
dc.subject	GEOTHERMAL CAPACITY
dc.subject	GEOTHERMAL ENERGY
dc.subject	GREENHOUSE
dc.subject	GREENHOUSE GAS
dc.subject	GREENHOUSE GAS EMISSIONS
dc.subject	HEAT
dc.subject	HEAT RATE
dc.subject	HYDROELECTRIC ENERGY
dc.subject	HYDROELECTRIC POWER
dc.subject	INPUT PRICES
dc.subject	INTERNATIONAL ENERGY AGENCY
dc.subject	IRREVERSIBLE INVESTMENTS
dc.subject	MARGINAL COST OF ELECTRICITY
dc.subject	MARGINAL GENERATION
dc.subject	MARGINAL GENERATION COST
dc.subject	MARKET PRICES
dc.subject	MEMBER STATES
dc.subject	MONOPOLY
dc.subject	NATURAL GAS
dc.subject	NATURAL GAS CONSUMPTION
dc.subject	NATURAL GAS OUTPUT
dc.subject	NATURAL GAS PRICES
dc.subject	NATURAL RESOURCES
dc.subject	NUCLEAR ELECTRICITY
dc.subject	NUCLEAR ENERGY
dc.subject	NUCLEAR FUEL
dc.subject	NUCLEAR GENERATION
dc.subject	NUCLEAR PLANTS
dc.subject	NUCLEAR POWER
dc.subject	OIL
dc.subject	OIL PRICE
dc.subject	OIL PRICES
dc.subject	OIL REFINERIES
dc.subject	PETROLEUM
dc.subject	POLLUTION
dc.subject	POTENTIAL DEMAND
dc.subject	POWER
dc.subject	POWER GRID
dc.subject	POWER PRODUCERS
dc.subject	POWER SECTOR
dc.subject	PRICE CHANGES
dc.subject	PRICE ELASTICITY
dc.subject	PRICES OF FUELS
dc.subject	PRICING MODEL
dc.subject	PRIMARY ENERGY
dc.subject	PRIMARY FUEL
dc.subject	PRODUCTION OF ELECTRICITY
dc.subject	PURCHASING
dc.subject	REDUCTION IN CARBON
dc.subject	RENEWABLE ELECTRICITY
dc.subject	RENEWABLE ENERGY
dc.subject	RENEWABLE ENERGY CAPACITY
dc.subject	RENEWABLE ENERGY GENERATION
dc.subject	RENEWABLE ENERGY RESOURCES
dc.subject	RENEWABLE GENERATION
dc.subject	RENEWABLE RESOURCES
dc.subject	RENEWABLE SOURCES
dc.subject	SALES
dc.subject	SPOT PRICES
dc.subject	STOCKS
dc.subject	SUBSTITUTES
dc.subject	SULFUR
dc.subject	SULFUR DIOXIDE
dc.subject	SURPLUS
dc.subject	THERMAL EFFICIENCY
dc.subject	WHOLESALE PRICES
dc.subject	WIND
dc.title	Substitution and Technological Change under Carbon Cap and Trade : Lessons from Europe
dc.type	Publications & Research :: Policy Research Working Paper
dc.coverage	Europe and Central Asia
dc.coverage	Europe and Central Asia