Understanding the effect of an emissions trading scheme on electricity generator investment and retirement behaviour: the proposed Carbon Pollution Reduction Scheme
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The objective of a greenhouse gas (GHG) emissions trading scheme (ETS) is to
reduce emissions by transitioning the economy away from the production and consumption
of goods and services that are GHG intensive. A GHG ETS has been a
public policy issue in Australia for over a decade. The latest policy initiative on an
ETS is the proposed Carbon Pollution Reduction Scheme (CPRS). A substantial
share of Australia’s total GHG reduction under the CPRS is expected to come
from the electricity generation sector. This paper surveys the literature on investment
behaviour under an ETS. It specifically focuses on the relationship between
the design of an ETS and a generator’s decisions to invest in low emissions plant
and retire high emissions plant. The proposed CPRS provides the context for
presenting key findings along with the implications for the electricity generation
sector’s transition to lower emissions plant. The literature shows that design
features such as the method of allocating permits, the stringency of the emissions
cap along with permit price uncertainty, provisions for banking, borrowing and
internationally trading permits, and the credibility of emissions caps and policy
uncertainty may all significantly impact on the investment and retirement behaviour
of generators.