Climate policy measures aimed at power markets influence the cost structure of producers and price patterns, and are therefore likely to influence the production decision of power plants, even in the short run. When power plants have costs related to starting and stopping, decisions on short-term production are intertemporal, and the conventional 'price vs. marginal cost' rule is not sufficient to predict production in thermal power plants. This paper analyzes how the optimal production decision is influenced by climate policies: namely, C[O.sub.2] trading mechanisms, the expansion of renewables and the interaction between these policies.
The main result is that higher ...