The second‐round effects of carbon taxes on power project finance

Abstract

Purpose

The most problematic area of any carbon policy debate is the treatment of incumbent CO2 intensive coal‐fired electricity generators. Policy applied to the electricity sector is rarely well guided by macroeconomic theory and modeling alone, especially in the case of carbon where the impacts are concentrated, involve a small number of firms and an essential service. The purpose of this paper is to examine the consequences of poor climate change policy development on the efficiency of capital markets within the Australian electricity sector.

Design/methodology/approach

The authors conducted a survey of Australian project finance professionals to determine the risk profiles to be applied to the electricity sector, in the event a poorly‐designed climate change policy is adopted.

Findings

The Australian case study finds that if zero compensation results in the financial distress of project financed coal generators, finance costs for all plant rises, including new gas and renewables, leading to unnecessary increases in electricity prices. Accordingly, an unambiguous case for providing structural adjustment assistance to coal generators exists on the grounds of economic efficiency.

Originality/value

Accordingly, the paper shows that an unambiguous case for providing structural adjustment assistance to coal generators exists, on the grounds of economic efficiency.

Citation

Simshauser, P. and Nelson, T. (2012), "The second‐round effects of carbon taxes on power project finance", Journal of Financial Economic Policy, Vol. 4 No. 2, pp. 104-127. https://doi.org/10.1108/17576381211228970