Abstract
Climate policies do not affect all power producers equally. In this paper, we evaluate the supply-side distributional consequences of emissions reduction policies using a simple and novel partial equilibrium model where production takes place in technology-specific sites. In a quantitative application hydro, wind and solar firms generate power combining capital and sites which differ in productivity. In contrast, the productivity levels of coal, gas and nuclear technologies are constant across sites. We parameterise the model to analyse the effects of stylised tax and subsidy schemes. Carbon pricing outperforms all other instruments and, crucially, leads to more equitable outcomes on the supply side. Technology-specific and uniform subsidies to carbon-free producers result in a greater welfare cost and their supply-side distributional impacts depend on how they are financed. Power consumption taxes have exceptionally high welfare costs and should not be the instrument of choice to reduce emissions or to finance subsidies aiming to reduce emissions.
Highlights
Fossil fuel use by the power sector is the largest source of carbon emissions in most countries
In this paper we study an oft-neglected aspect of the problem, namely the supply-side distributional impacts of climate policies within the power sector
We propose a simple deterministic partial equilibrium model of the power sector with multiple generation technologies
Summary
Fossil fuel use by the power sector is the largest source of carbon emissions in most countries. We use the model to compare policy instruments deployed by governments around the world to reduce emissions These instruments include carbon pricing, taxes on and subsidies to inputs or outputs of various generators, and power consumption taxes, all standardised to achieve the same reduction in emissions. Technology-specific subsidies financed by carbon pricing imply a more equitable distribution of the benefits and costs of climate policies than when they are financed by general tax revenues, borrowing or power consumption taxes. This is because the negative impact on the profits of the carbon-free firms which do not receive the subsidy is more than offset by the increase in power price implied by the carbon price required to pay for the subsidy.
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