Climate policy in power sector: Feed-in tariff and carbon pricing

Abstract

The purpose of this chapter is to investigate the effects of some mainstream policy schemes in the power sector on the reduction of CO2 emissions. The first part of this chapter is the analysis on the effects of promoting generation (fuel) efficiency of fossil-fuel power generation, specifically assuming more efficient coal-fired power plants that recently indicates increased presence in the Japanese power sector. Improvement in generation efficiency of fossil-fuel power plants is expected to reduce emissions of carbon dioxide mainly from a technological aspect. However, overall effects on carbon reduction in the whole industry would be ambiguous since it also depends on market structure. The increased efficiency in generation leads to an improvement in cost conditions of fossil-fuel power producers relative to their rivals. It enables them to expand their generation and market share. Analyzing the Cournot oligopoly model, it is shown that an improvement in fossil-fuel power generations produces two effects: the ‘saving effect’ and the ‘rebound effect’. The total CO2 emission in the whole industry decrease if the former effect exceeds the other, and vice versa. In addition, it is indicated that a rise in the generation efficiency would increase a difficulty of implementing carbon tax. In the second part of this chapter, I study the combination of feed-in tariff and carbon tax; that would be worthy to investigate since they could possibly complement each other. FIT policy could be financed by the revenue of carbon tax, and a reduction in electricity supply by the carbon tax would be lessen by supporting renewable power generations under FIT. It is demonstrated that FIT had the combined effects: it fosters a competitive environment in addition to indirectly reduces CO2 emissions. The result indicates that the combination of these policies would produce potential welfare gains.