1. The Effects of a Carbon Charge on Electricity Generation – Comparing Two Models Presentation to Motu Climate Economics Research Workshop 21 March 2012 Adolf Stroombergen

2. Models Evans: electricity market model Forward looking expectations Uncertain lake inflows Storage options Two inputs: gas and hydro (proxy fossil fuel and renewables) ESSAM Traditional general equilibrium model Four electricity inputs: coal, gas, oil and renewables Elasticities of substitution between fuels No hydro storage

3. 2020 Scenarios Scenario 1 Scenario 2 Evans et alMED % change on BAU Private Consumption-0.6 Exports-1.1 Imports-0.6 GDP-0.6 RGNDI-0.5 Terms of trade 0.9 CO 2 e emissions-4.5-5.3 Electricity generation Coal-4.6-20.4-46.3 Gas-2.2-5.1 0.0 Renewable-3.30.1 5.0 Total-3.2-2.7 -0.1 Evans: For $25/tonne CO 2 : Gas generation: -10.3% Hydro generation: 0% For $50/tonne CO 2 : Gas generation: -18.6% Hydro generation: 0% Evans: Implicit σ (GC)H ≈0.40 ESSAM: Need σ GC ≈0.85 to get Evans’ result: Scenario 2 MED: Electricity price up 9.4%, but no change in demand. ESSAM: -3.0%, Evans: -4.1% Change in coal generation by assumption.

4. Coal-Gas Substitution Is an elasticity sensible? Short run v long run Huntly, old and inefficient (dual fuel, fast switching) Choice of new thermal: location, resource consent