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The above results demonstrate that the introduction of a carbon price in the United States would lead to some fuel switching. The degree of this switching can be estimated based on the latest share of fuels in the mix, current fuel prices, carbon and fuel price projections, and the estimates from the model above. This approach is illustrated below with data from Spain, considering changes in all fuel prices: a price on CO2 would increase the price of coal the most, with the price of gas being affected the least.

Spain provides a picture that differs from the United States in two respects: first, the generation side of the market 60y is entirely liberalised in Spain; second, continental Spain only uses coal and gas, allowing the analysis to focus on the cross-elasticities of two, rather than three, fuels. In the United States, the majority of states are either not active in, or have suspended, the restructuring process,3 whereas in Spain's wholesale market the majority of the electricity generated from fossil fuels is sold at or linked (through bilatereal contracts) to the prices set by the electricity pool.4 Elasticity estimation results for Spain are shown in Table 2.

Table 2

Spain's peninsular cross-price elasticities

Table 2

Spain's peninsular cross-price elasticities

Price of

Demand

Coal

Gas

Coal

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