Keywords: fuel switching, European Union Emission Trading Scheme, EU ETS, energy economics, carbon finance, cabon emissions, carbon trading, short–term abatement, CO2, carbon dioxide, combined cycle gas turbines, CCGTs, energy efficiency, environmental efficiency, power plants, fuel prices, marginal cost, gas price, coal price
Understanding fuel switching under the EU ETS
Since the creation of the European Union Emission Trading Scheme (EU ETS), European power producers have monitored carbon emissions resulting from the composition of their production. Fuel switching is the main short–term abatement measure under the EU ETS. It consists in substituting combined cycle gas turbines (CCGTs) for hard–coal plants in off–peak power generation. Thereby coal plants run for shorter periods, allowing power producers to reduce their CO2 emissions. The aim of this paper is two–fold. First, we summarise the main characteristics of fuel switching under the EU ETS. Second, we show how differences in the energy/environmental efficiency of power plants impact the marginal cost of fuel switching. We demonstrate that the level of switching effort influences the dependence of the marginal cost of switching on fuel prices. The marginal cost of switching is shown to be increasingly dependent on the gas price as the switching effort increases, whereas the net effect is undetermined for the coal price. All the conclusions are summarised in several illustrative examples.