Internalisation of externalities in the spanish power generation sector. Impact of the national plan of allocation of emissions in the cost of generation

Abstract

The electric generation produces damages (externalities or environmental costs) that are not contemplated in the costs of this activity. A way to include these damages in the cost is based on the emission rights. In these instruments the total amount of allowed contamination is fixed. It is assigned to the polluting agents by means of emission permissions, creating a market of these, in which the agents can exchange them based on their interests. In 2005, Spain undertook the National Plan of Allocation of Emission Rights 2005-2007 (PNA 2005-2007). This plan has established an emission limit to the electrical sector and it has been translated in the allocation of emission rights. If this emissions limit is surpassed they must acquire rights that cover the exceeded. Thus, the companies must reduce their emissions without increasing their costs. What mix of generation is have to be implement in order to minimize the emissions, avoiding to charge the emission rights in the total generation cost?. If it is impossible to cover the demand without this extra cost, how to diminish it? These questions can be responded using optimization methods.