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The paper analyses impacts of environmental regulation on Czech power system. We employ MESSAGE modelling platform to construct a dynamic linear optimisation energy model of the Czech power system. We analyse regulation impacts on fuel use and CO2 emission, fuel-mix and technology-mix, induced investment and fuel and other O&M costs to generate electricity over the period 2006-2030. Negative external costs attributable to endogenously determined new level of air quality pollutants are quantified to make our cost-benefit analysis more complex. Overall, effects of four policy scenarios are assessed, including subsidies for renewable energy, increase in air quality charge rates and an introduction of the EU ETS in the Czech power system. Based on our simulation, we find that prospected 10-fold increase in charging of air quality pollutant would not have any significant effect on emission and would not bring any stimuli for change in technology and fuel mixes. Subsidy to renewable energy would result in their development; however, larger effect would appear in far future and only if new nuclear power units are not allowed to build. Auctioned EUA, especially above Euro15 per tonne of CO2, would be the only effective instrument with significant effects on power sector. Key factor on CO2 emission is whether scenario consists of new nuclear power units or these units are banned. Our simulation results hold even if we allow the key model assumption to vary, except, the discount rate that would have effect on whether more-investment intensive technologies are used to generate electricity. Adapted from the source document.

Elasticity of factor substitution is one of the key parameters of any computational general equilibrium model. Despite a wide use of this model in a policy analysis, there are a few estimates of the elasticity, with almost none for transition economies in Europe. To fill this gap, we estimate the elasticity of substitution between Capital, Labour, Energy and Material in the constant elasticity of substitution (CES) production function. We use a non-linear estimation technique to derive these elasticities for the whole economy and for five different sectors, for the EU as a whole and for its two sub-regions. We find that Cobb-Douglas and the Leontief production functions do not fit the data better than more flexible CES specification, and after evaluating several multiple KLEM nesting structures of the CES production function we conclude that KL-E and KL-EM nesting structures fit the data best in both EU regions and for the most economic sectors. The economy-wide factor substitution elasticity complies to the one reported in the literature, however, its magnitude varies across sectors, and it is much larger for the energy-intensive sectors. The elasticities also differ between the EU economies in the West and in the East, although their magnitude is converging in more recent years. We recommend a set of the specific elasticities to be used in the impact modelling and conclude that the estimates based on more recent data and that are region-specific should be used in CGE-based policy applications.