Tuesday, September 22, 2009

Part V: Impact of 2020 limits

The previous posts showed the calculations for the revenue collected in the short-run (up to 2012), where the time frame is too short for the producers to change the means of production (no changes in the supply curve) and the consumers respond only to the price, but cannot alter their demand habits (i.e., no shift in the demand curve, just going up and down) . Over the longer time-frame, the consumer habits can certainly change, and the long-run elasticity has been estimated to be 0.7 for electricity. The emissions reduction is expected to be 17%. If we assumed that the producers are unable to change their production mix at all (not a realistic assumption, but this will provide the worst case, highest cost answer), then once again, the price of carbon can be estimated using the relationships described in part IV.

Interestingly, even though the limits for 2020 are ~6X the limit for 2012, the price increases from $24.5 to only $39.5, ~60%. The reason for this significantly lower increase is the higher value of elasticity of demand for electricity over the long run.

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