The economics of power generation and climate policy

Abstract: This thesis consists of an introduction and six self-contained papers addressing the economics of electric power generation and climate policy. Paper I explores systematically the use of spatial econometric techniques in testing for convergence of CO2 emissions per capita across countries. Giving weight to spatial dependence in the data, our main findings suggest that there appears to be a spatial relationship in explaining environmental convergence. We find evidence for both sigma and conditional beta convergence of per capita CO2 emissions. Paper II discusses how the design of climate policy in a small open economy may affect the internalization of carbon-related external costs and ultimately the social choice between different power generation technologies. The results show that the social cost of power generation technologies in Sweden will be significantly influenced by the choice of climate policy regime. If Sweden would abandon its present national target for CO2 emissions and instead make full use of the country's participation in international emissions trading, natural gas-fired power would replace onshore wind power as the power generation source with the lowest social cost. Paper III analyzes the costs for reducing CO2 emissions in the power-generating sectors in Eastern Europe by using a linear programming model. The model takes into account the impact of technology learning and the underlying assumptions of the RAINS model. The results, based on a 15 percent reduction target for CO2 emissions, show that the marginal cost of switching to either a low-carbon or to a renewable energy source differs significantly among the countries. The results also indicate that the Eastern European countries are not homogeneous in terms of CO2 abatement potential and costs. This may have important implications for future JI activities. Risk factors such as policy uncertainty and institutional obstacles may become crucial in determining the future allocation of JI/CDM projects across the region. Paper IV analyzes the impact of climate policy and technology learning on future investments in the Swedish power sector. Methodologically we assess the lifetime engineering costs of different power-generating technologies in Sweden, and analyze the impact of carbon pricing on the competitive cost position of these technologies under varying rate-of-return requirements. We also argue that technological learning in the Swedish power sector is strongly related to the presence of inter-national learning and R&D spillovers. The results suggest that renewable power will benefit from existing EU climate policy measures, but overall additional policy instruments are also needed to stimulate the diffusion of renewable power. Moreover, wind power may gain considerable competitive ground due to international techno-logy learning impacts. Paper V analyzes how market and policy uncertainties affect the general profitability of new investments in the Swedish power sector, and investigate the associated investment timing and technology choices. We develop a simple economic model for new investments in power generation and by simulating and modeling policy effects through stochastic prices the results suggest that bio-fuelled power is the most profitable technology choice in the presence of existing policy instruments. The likelihood of choosing gas power increases over time at the expense of wind power due to the relative capital requirement per unit of output for these technologies. Overall the results indicate that the economic incentives to postpone investments into the future are significant. Finally, Paper VI analyzes the role and the nature of price-induced switching behavior between fossil fuels in the western European power sector, as well as the fuel choice impacts of a number of public policies implemented in this sector during the last 20 years. The analysis is conducted within a Generalized Leontief cost function framework. The empirical results indicate a rejection of the null hypo-thesis of zero ex post fuel substitution, and show evidence of notable short-run interfuel substitution between oil and gas. The results also illustrate that different public policies have had profound impacts on fossil fuel choices and they have in particular favored power generation gas use