Energy and environment: Reducing CO2 emissions from the electric power industry

Abstract

The purpose of this paper is to (1) investigate the production (cost) structure of electric power generation in view of CO2 emissions reduction policies; (2) empirically analyze the role of uncontrolled CO2 emissions in shaping the production structure of the industry; and (3) explore long-run strategies for reducing CO2 emissions generated by the industry. For the implementation of our purpose, two methodological approaches were used: the econometric approach and the economic-engineering approach. The econometric approach, based on the translog production technology, focuses on issues relating to cost structure of the industry, input relationships (i.e., substitutability vs. complementarity), and related CO2 policy issues. On the other hand, the economic-engineering approach, which is a synthesis of a probabilistic simulation and a dynamic programming model, develops least-cost expansion plans aimed at reducing CO2 emissions to desired levels. The estimates obtained from the econometric model reveal that the production (cost) structure of the electricity industry in Greece has become heavily reliant on a high-carbon fuel technology (i.e., lignite generation of electricity). However, the estimated partial elasticities of substitution suggest that carbon taxes will induce a shift away from lignite to oil and hydro technologies, and energy conservation. On the other hand, the findings supplied by the economic-engineering model suggest policy options, which are not presently in use, to reduce CO2 emissions. Specifically, the findings indicate that lignite generation can be replaced by natural gas, coal, or lignite technologies with CO2 removal capabilities, hydro and other renewable generating technologies. Effective carbon tax policies leading to least-cost expansion plans depend on the size of the target and its timing.