Counterproductive environmental policies: Long term versus short term substitution effects of gas in a liberalised electricity market

1 Abstract In Norway, the environmental impact of building gas power in a liberalised market has been the main controversy for over a decade. Proponents of natural gas argue natural gas substitute more dirty sources of electricity generation within the Nordic market, while opponents argue there is no such guarantee and choose to focus on domestic emissions. Despite several efforts, energy models have failed in resolving this controversy satisfactory. A survey of previous studies using present energy models (EMPS and NORDMODT) for decision support is presented. The models have been re-run and their sensitivity towards specification assumptions examined. Second part presents a system dynamics model particularly designed to address the shortand long run impacts of energy policies. Results show that gas power will substitute some coal in the short term (as argued by the gas proponents), but that the substitution effect is modest. When including long-term substitutional effects of new investments, gas power also substitute future investments in renewables which results in a net increase in CO2emissions in the long run. These findings raise serious questions about the environmental benefit of the fuel substitution strategy.