The second‐round effects of carbon taxes on power project finance

Purpose – The most problematic area of any carbon policy debate is the treatment of incumbent CO2 intensive coal‐fired electricity generators. Policy applied to the electricity sector is rarely well guided by macroeconomic theory and modeling alone, especially in the case of carbon where the impacts are concentrated, involve a small number of firms and an essential service. The purpose of this paper is to examine the consequences of poor climate change policy development on the efficiency of capital markets within the Australian electricity sector. Design/methodology/approach – The authors conducted a survey of Australian project finance professionals to determine the risk profiles to be applied to the electricity sector, in the event a poorly‐designed climate change policy is adopted. Findings – The Australian case study finds that if zero compensation results in the financial distress of project financed coal generators, finance costs for all plant rises, including new gas and renewables, leading to unnecessary increases in electricity prices. Accordingly, an unambiguous case for providing structural adjustment assistance to coal generators exists on the grounds of economic efficiency. Originality/value – Accordingly, the paper shows that an unambiguous case for providing structural adjustment assistance to coal generators exists, on the grounds of economic efficiency.