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Abstract
Mitigating climate change will require reduced use of fossil fuels to generate electricity. To do so
and eschewing nuclear power, countries have turned to wind energy. In this study, we discuss
how screening curves and load duration can be used to determine the optimal investment in
generating assets, and extend this method to include wind and nuclear energy sources. We then
use this approach to investigate the effects of carbon taxes and feed-in tariffs (FITs) on the
optimal generation mix and the potential for reducing CO2 emissions. We find that a carbon tax
is likely more effective than a feed-in tariff for removing fossil fuel assets and incentivizing
investment in wind power. The tax leads to the removal of coal-fired capacity that is replaced by
combined-cycle gas generation. However, if nuclear energy is permitted to enter the mix, the tax
results in coal capacity replaced by nuclear power instead of gas, which leads to a significant
reduction in greenhouse gas emissions compared to any other alternative considered. We also
find that, because wind cannot substitute for baseload generation, the additional investment in
wind resulting from a carbon tax or FIT is small compared to the absence of any incentives (only
7%). Finally, if the tax and FIT lead to the same mix of generating assets, the income
distributional effects can be quite large. It is the distributional effects of policy, and associated
rent seeking activities to implement a FIT, that could be the deciding factor in choosing between
a carbon tax and feed-in tariff.