Ruud Egging, Daniel Huppmann
We present an energy market equilibrium model that captures climate aspects, infrastructure constraints, fuel substitution, and market power `a la Cournot in a single framework. The model represents the supply and transportation infrastructure, fuel transformation, power generation, and several demand sectors of fossil fuels, renewables and nuclear energy. We calibrate the model to market data from the year 2010, with a detailed representation of Europe and the rest of the world represented by continent. We analyze the impact of various regional and global CO2 tax levels and the consequences of a nuclear phase out in Germany. Our results illustrate that positive effects of regional CO2 taxes can be largely undone through carbon leakage and that global CO2 tax levels affect countries differently, dependent on factors such as the fuel mix and idle capacity in power generation. The regional fuel mix in Europe is affected less by a global than a local tax. Finally, Germany is well-connected to surrounding countries, and its potential to increase the use of renewables and import gas and electricity is high enough to compensate for a nuclear phase out.
Keywords: Fuel substitution, environmental policy, market power, mixed complementarity problem
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