Internalising externalities: are cogeneration subsidies high enough?

This paper evaluates the Spanish system of environmental subsidies for cogeneration processes and analyses their capacity to overcome these barriers. In particular, we focus on the role and relevance of the monetary aids paid to traditional electricity producers - such as aid to national coal and competition transition charges – in creating a barrier to the development of cogeneration. As we shall see, subsidising cogeneration systems results in welfare gains that could be increased if the aid rendered to conventional electricity producers were reduced or discontinued. Next, we compare the environmental cost of the different methods of producing electricity. We then present the system of cogeneration subsidies contemplated by Spanish legislation, before going on to examine the economic incentives and effects to which this system gives rise and study the implications for energy consumption. Finally, we conclude with a series of recommendations that may prove useful for other European countries.