Regulated Early Closures of Coal-Fired Power Plants and Tougher Energy Taxation on Electricity Production: Synergy or Rivalry?

Abstract

This chapter examines the economic and environmental effects of the interaction between regulated early closure of coal-fired power plants and new energy taxation rules on such plants using a dynamic general equilibrium model of the Portuguese economy. Simulation results show that regulated early closures lead to meaningful emission reductions but induce significant detrimental macroeconomic and distributional effects. Upon application of the new energy taxation rules, no significant environmental gains or macroeconomic and distributional losses are observed beyond those already induced by the forced closures. The public sector also seems to benefit from additional tax revenues. If the coal-fired power plants operators react by unilaterally decommissioning their installations, however, the adverse macroeconomic and distributional effects will substantially deteriorate even though the environmental ones improve. Moreover, the adverse budgetary effects will be substantially larger. Overall, we find no synergies between the two policies and, in fact, the opposite is potentially true.