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Emissions Trading in Forward and Spot Markets for Electricity

Makoto Tanaka and Yihsu Chen

Year: 2012
Volume: Volume 33
Number: Number 2
DOI: 10.5547/01956574.33.2.9
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Abstract:
Tradable allowances have received considerable attention in recent years. One emerging issue is their interaction with electricity markets. This paper extends the model of Allaz and Vila (1993) by incorporating emissions trading with forward and spot markets for electricity. We focus on the effects of strategic forward position and initial allowances allocation on the equilibrium outcomes. We find that firms with a dirty portfolio would have stronger incentives to take a long position in the forward market to raise the electricity price. Increasing the amount of allowances assigned to clean firms leads to a reduction in electricity and allowance prices. Keywords: Cap-and-Trade, Market Power, Forward Contract



Market Power with Tradable Performance-Based CO2 Emission Standards in the Electricity Sector

Yihsu Chen, Makoto Tanaka, and Afzal S. Siddiqui

Year: 2018
Volume: Volume 39
Number: Number 6
DOI: 10.5547/01956574.39.6.yche
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Abstract:
The U.S. Clean Power Plan stipulates a state-specific performance-based CO2 emission standard, delegating states with considerable flexibility for using either a tradable performance-based or a mass-based permit program. This paper analyzes these two standards under imperfect competitive. We limit our attention to (1) short-run analyses and (2) a situation in which all states are subject to the same type of standard. We show that while the cross-subsidy inherent in the performance-based standard might effectively reduce power prices, it could also inflate energy consumption. A dominant firm with a relatively clean endowment under the performance-based standard would be able to manipulate the electricity market as well as to elevate permit prices, which might worsen market outcomes compared to its mass-based counterpart. On the other hand, the "cross-subsidy" could be the dominant force leading to a higher social welfare if the leader has a relatively dirty endowment.



Economic and Environmental Consequences of Market Power in the South-East Europe Regional Electricity Market

Verena Viskovic, Yihsu Chen, Afzal S. Siddiqui, and Makoto Tanaka

Year: 2021
Volume: Volume 42
Number: Number 6
DOI: 10.5547/01956574.42.6.vvis
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Abstract:
Market power in electricity and emission-permit markets in the South-East Europe Regional Electricity Market, which comprises both EU members subject to the EU Emissions Trading System (ETS) and non-EU members exempt from it, affects social welfare and carbon leakage. We examine its impact under three market settings: perfect competition (PC) and two leader-follower versions, in which a leader can exert market power in either the electricity market (S-T) or both the electricity and permit markets (S). Under PC, carbon leakage is equal to 11%-39% of ETS emission reduction depending on the cap stringency. Generally, in S-T, the leader's capacity withholding results in ETS emissions below and non-ETS emissions above PC levels. However, carbon leakage is lower vis-à-vis PC as the ETS emission reduction offsets the non-ETS emission increase. Finally, in S, the leader's propensity to lower the permit price increases ETS emissions and exacerbates carbon leakage compared to S-T.





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