A comparative analysis of energy and CO2 taxes on the primary energy mix for electricity generation

In many countries, economies are moving towards internalization of external costs of greenhouse‐gas (GHG) emissions. This can best be achieved by either imposing additional taxes or by using an emission‐permit‐trading scheme. The electricity sector is under scrutiny in the allocation of emission‐reduction objectives, not only because it is a large homogeneous target, but also because of the obvious emission‐reduction potential by decreasing power generation based on carbon‐intensive fuels. In this paper, we discuss the impact of a primary‐energy tax and a CO₂ tax on the dispatching strategy in power generation. In a case study for the Belgian power‐generating context, several tax levels are investigated and the impact on the optimal dispatch is simulated. The impact of the taxes on the power demand or on the investment strategies is not considered. As a conclusion, we find that a CO₂ tax is more effective than a primary‐energy tax. Both taxes accomplish an increased generation efficiency in the form of a promotion of combined‐cycle gas‐fired units over coal‐fired units. The CO₂ tax adds an incentive for fuel switching which can be achieved by altering the merit order of power plants or by switching to a fuel with a lower carbon content within a plant. For the CO₂ tax, 13 €/tonCO₂ is withheld as the optimal value which results in an emission reduction of 13% of the electricity‐related GHG emissions in the Belgian power context of 2000. A tax higher than 13 €/tonCO₂ does not contribute to the further reduction of GHGs. Copyright © 2005 John Wiley & Sons, Ltd.