Climate policy and the social cost of power generation: Impacts of the Swedish national emissions target

The purpose of this paper is to discuss how the design of climate policy in a small open economy may affect the internalization of carbon-related external costs and ultimately the social choice between different power generation technologies. Empirically we focus on the Swedish case and analyze three climate policy regimes, out of which two represent different national goal formulations and thus compliance strategies. The results show that the social choice between power generation technologies in Sweden will be significantly influenced by the choice of climate policy regime. Most notably, if Sweden would abandon its present national target for carbon dioxide emissions and instead make full use of the countryʹs participation in international emissions trading, natural gas-fired power would replace onshore wind power as the power generation source with the lowest social cost.