Regulated Early Closures of Coal-Fired Power Plants and Tougher Energy Taxation on Electricity Production: Synergy or Rivalry?

Abstract

This article examines the economic, budgetary, distributional and environmental impacts of the interaction between regulated early closure of coal-fired power plants and new energy taxation rules on fossil fuel-operated power plants using a multi-sector and multi-household dynamic general equilibrium model of the Portuguese economy. Simulation results show first that regulated early closures will lead to meaningful reductions in emissions. They will also induce significant detrimental macroeconomic and distributional effects. Second, when the new energy taxation rules are applied to the coal-operated power plants no significant environmental gains or macroeconomic or distributional losses are observed in addition to what already induced by the forced closures. Only the public sector seems to benefit in the form of additional tax revenues. A different situation occurs, however, if the operators of the coal-fired power plants react to the new energy taxes levied on them by unilaterally deciding to decommission their installations. In this case, although the environmental effects will improve, the adverse macroeconomic and distributional effects will substantially deteriorate. Noticeably, the adverse budgetary effects will also be substantially larger. Overall, we find no synergies between the two policies and, actually, the potential for the opposite to be true.