[en] The Regional Greenhouse Gas Initiative (RGGI) is a state-level effort by ten northeast states in the U.S. to control CO₂ emissions from the electric sector. The approach adopted by RGGI is a regional cap-and-trade program, which sets a maximal annual amount of regional CO₂ emissions that can be emitted from the electric sector. However, incoherence of the geographic scope of the regional electricity market is expected to produce two undesirable consequences: CO₂ leakage and NO_x and SO₂ emissions spillover. This paper addresses these two issues using transmission-constrained electricity market models. The results show that although larger CO₂ leakage is associated with higher allowance prices, it is negatively related to CO₂ prices if measured in percentage terms. On the other hand, SO₂ and NO_x emissions spillover increase in commensurate with CO₂ allowance prices. Demand elasticity attenuates the effect of emissions trading on leakage and emissions spillover. This highlights the difficulties of designing a regional or local climate policy. (author)

[en] The Regional Greenhouse Gas Initiative (RGGI) is a state-level effort by ten northeast states in the U.S. to control CO₂ emissions from the electric sector. The approach adopted by RGGI is a regional cap-and-trade program, which sets a maximal annual amount of regional CO₂ emissions that can be emitted from the electric sector. However, incoherence of the geographic scope of the regional electricity market is expected to produce two undesirable consequences: CO₂ leakage and NO_x and SO₂ emissions spillover. This paper addresses these two issues using transmission-constrained electricity market models. The results show that although larger CO₂ leakage is associated with higher allowance prices, it is negatively related to CO₂ prices if measured in percentage terms. On the other hand, SO₂ and NO_x emissions spillover increase in commensurate with CO₂ allowance prices. Demand elasticity attenuates the effect of emissions trading on leakage and emissions spillover. This highlights the difficulties of designing a regional or local climate policy.

[en] This paper analyses the impact of power market structure on the pass-through rate (PTR) of CO2 emissions trading costs on electricity prices from a theoretical point of view, including graphical illustrations and mathematical proofs. Market structure refers in particular to the number of firms active in the market as well as to the shape of the power demand and supply curves. In addition, it analyses the impact of other power market related factors on the PTR of carbon costs to electricity prices, notably the impact of ET-induced changes in the merit order of power generation technologies or the impact of pursuing other market strategies besides maximising generators' profits, such as maximising market shares or sales revenues of power companies. It shows that each of these factors can have a significant impact on the rate of passing-through carbon costs to electricity prices

[en] Highlights: • We compare a regional and a state-by-state tradable performance-based policy to a mass-based C&T. • Permit prices could diverge even with permit trading under the state-by-state policy. • Mass-based C&T remains most effective. - Abstract: Two types of emission trading programs are allowed under the US federal Clean Power Plan (CPP): mass-based cap-and-trade (C&T) program, and the performance-based trading program. While a C&T sets a total emission cap for a region, a performance-based program under CPP relies on trading the emission rate credits (ERCs), which represent an equivalent MWh of energy generated or saved with zero associated CO₂ emissions, to reduce emission costs. This paper examines the theoretical properties of the tradable performance-based policy and compares it to a C&T program. We distinguish two kinds of tradable performance-based policy: (1) a regional policy, under which all states are subject to a regional performance-based standard, and (2) a state-by-state policy, under which each state adopts its performance-based policy within a regional power market while trading of ERCs is allowed. Our findings indicate that under a state-by-state policy, power prices across states could be different even without any transmission congestion, reflecting varying stringency of tradable performance-based standards among states within an interconnected market. We also identify a counterintuitive result that even if ERCs trading is allowed under the state-by-state performance policy, the permit prices could diverge. Two models are simulated in our analysis: three-state and the Pennsylvania-Jersey-Maryland (PJM) regional power market. While the three-state example allows us to illustrate the theoretical properties of the policies, the PJM-based simulation allows us to gauge the performance of the policies. Our PJM analysis shows that a C&T policy is the most effective, while the comparison between a regional and state-by-state tradable performance policy is ambiguous.

[en] Highlights: • We develop a multi-sector model of inter-temporal permit banking with market power. • With market power, the permit price rises at a higher rate than the discount rate. • Dominant firm behaves as a oligopsonist and oligopolist when trading the permits. • It suppresses the permit prices in early periods and inflate them in later periods. - Abstract: Several existing or proposed climate policies have considered bankable permits in a cap-and-trade (C&T) program that covers beyond a single sector, e.g., electric power, or allows the program to link to external C&T programs in other regions. This paper develops a model of permit banking under imperfect competition and imperfect inter-temporal arbitrage, in which the firms in one dominant sector can exert market power in both product and permit markets, while those in other sectors or linked programs are perfectly competitive. A simple analytical model is developed to generate contestable hypothesis. We further extend the model to account for the physical power system, institutional rules and market conditions, and then apply it to the Pennsylvania-Jersey-Maryland (PJM) market. We show that if the dominant firm has market power, then the permit price rises at a higher rate than the discount rate, contrary to perfectly competitive permit market, where the permit price rises at the discount rate following the classic Hotelling's rule. Furthermore, under a declining emissions cap system with the permits front-loaded in early time periods, the dominant firm has an incentive to suppress the permit prices (monopsony) when buying the permits in early periods, and then inflate the permit prices (monopoly) when selling them in later periods. Numerical results of the PJM case are consistent with the analytical conclusion.

[en] This paper examines the implications of alternative forms of cap-and-trade regulations on the California electricity market. Specific focus is given to the implementation of a downstream form of regulation known as the first-deliverer policy. Under this policy, importers (i.e., first-deliverers) of electricity into California are responsible for the emissions associated with the power plants from which the power originated, even if those plants are physically located outside of California. We find that, absent strict non-economic barriers to changing import patterns, such policies are extremely vulnerable to reshuffling of import resources. The net impact implies that the first-deliverer policies will be only marginally more effective than a conventional source-based regulation. - Highlights: • We model the effectiveness of rules designed to regulate the carbon content of electricity imports under California's carbon cap-and-trade system. • We construct a simulation of the electricity market in the Western U.S. based upon actual 2007 market data. • We perturb the market model with variations of cap-and-trade designs. • We find that current policy will lead to substantial “reshuffling” of emissions and limit the impact of California's emissions cap

[en] As part of its climate policy, the European Union (EU) aims to reduce greenhouse gas (GHG) emissions levels by 20% by the year 2020 compared to 1990 levels. Although the EU is projected to reach this goal, its achievement of objectives under its Emissions Trading System (ETS) may be delayed by carbon leakage, which is defined as a situation in which the reduction in emissions in the ETS region is partially offset by an increase in carbon emissions in the non-ETS regions. We study the interaction between emissions and hydropower availability in order to estimate the magnitude of carbon leakage in the South-East Europe Regional Electricity Market (SEE-REM) via a bottom-up partial equilibrium framework. We find that 6.3% to 40.5% of the emissions reduction achieved in the ETS part of SEE-REM could be leaked to the non-ETS part depending on the price of allowances. Somewhat surprisingly, greater hydropower availability may increase emissions in the ETS part of SEE-REM. However, carbon leakage might be limited by demand response to higher electricity prices in the non-ETS area of SEE-REM. Such carbon leakage can affect both the competitiveness of producers in ETS member countries on the periphery of the ETS and the achievement of EU targets for CO₂ emissions reduction. Meanwhile, higher non-ETS electricity prices imply that the current policy can have undesirable outcomes for consumers in non-ETS countries, while non-ETS producers would experience an increase in their profits due to higher power prices as well as exports. The presence of carbon leakage in SEE-REM suggests that current EU policy might become more effective when it is expanded to cover more countries in the future. - Highlights: • CO₂ leakage in the South-East Europe Regional Electricity Market is investigated. • A bottom-up equilibrium model for SEE-REM determines leakage into the non-ETS area. • 6.3% to 40.5% of the emissions reduction in the SEE-REM ETS area may be leaked.

[en] Climate policy has mostly focused on regulating power suppliers. There is a growing interest in exploring regulating emissions from the demand side by incentivizing consumers to reduce their energy consumptions, or to purchase power from cleaner sources through tracking carbon content of power flow in the transmission network. This paper analyzes market outcomes under two approaches: producer-based and demand-based carbon taxes. We formulate each approach as a market equilibrium model. For the consumer-based approach, the analysis assumes that a utility, procuring electricity on behalf of consumers, is subject to the carbon tax. For the producer-based approach, the producers are subject to the carbon tax, and therefore, pay for their emissions. We show that the two approaches are equivalent when the program's coverage is complete. However, when the coverage is incomplete, the consumer-based carbon tax is less effective in pricing carbon emissions owing to the fact that sales to unregulated regions are not subject to the carbon tax. Given that the transaction cost of implementing consumer-based tax is likely to be high, benefit of tracking power flows in order to estimate carbon content or footprint might not be justified even with a full coverage program.

[en] Highlights: • CO₂ leakage in a two-node region with limited policy jurisdiction is investigated • Partial coverage of emissions lowers welfare by enabling higher regional emissions • A partial-coverage policy also exacerbates carbon leakage • Modified coverage counts total emissions to improve welfare but increases leakage • Import coverage considering only imported emissions could mitigate leakage -- Abstract: Interconnected regional electricity markets are often subject to asymmetric carbon policies with partial coverage for CO₂ emissions. While the resulting problem of carbon leakage has been well studied, its mitigation has received relatively less attention. We devise a proactive carbon policy via a bi-level modelling approach by considering the impact of an emission cap that limits the cost of damage from a regional power market. In particular, a welfare-maximising policymaker sets the cap when facing profit-maximising producers and the damage costs from their emissions at two nodes. A partial-coverage policy could degrade maximised social welfare and increase total regional CO₂ emissions with potential for carbon leakage due to a higher nodal price difference. A modified carbon policy that considers CO₂ emissions from both nodes tightens the cap, which increases maximised social welfare and decreases total CO₂ emissions vis-à-vis the partial-coverage policy, albeit at the cost of greater scope for carbon leakage as it causes nodal prices to diverge. As a compromise, an import-coverage policy, implemented by California, that counts only domestic and imported CO₂ emissions could alleviate carbon leakage at the cost of lower maximised social welfare with higher total emissions vis-à-vis the modified-coverage policy.

[en] We propose a framework for analyzing the long-run effects of climate change on the spatial and temporal distribution of nitrogen oxide (NOx) emissions from the power sector. Elevated ground-level temperatures could increase electricity demand during the ozone season, altering the generation mixes and ultimately changing emissions. A sequence of load forecasting, supply investment and operation, and facility siting models is used to project spatial and temporal distributions of NOx emissions. Under a worse-case scenario with no renewable additions or other interventions, the results indicate that even if total NOx is limited by cap-and-trade policies, climate-warming-induced changes in the timing of pollution emissions can be significant, especially under warmer or high-load conditions. This suggests that a continued reliance on fossil-fuel together with a temperature sensitivity of generation efficiency and peak electricity demands increases the likelihood that emissions will be greater during the warm days when ozone episodes also occur. The paper advances the integrated assessment by identifying ways at which climate-change-derived energy demand can impact generation mixture, operations and local air pollution. The downscaled emissions can be used in regional air quality models such as the Community Multiscale Air Quality (CMAQ) to project changes in tropospheric ozone due to climate change. -- Highlights: •We develop a framework to study the impact of climate-induced changes on electricity sector. •It could affect spatial and temporal distribution of pollution emissions in the long run. •Under a worse-case assumption, significant emissions during peak demand hours could occur. •It could possibly worsen regional air quality, even if seasonal emissions are constant under cap. •A separate cap or tax can be applied to extreme weather conditions to avoidworsening air quality