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Carbon Charges in Electricity Markets with Strategic Behavior and Transmission

Abstract:
We examine the effect of introducing a carbon charge on electricity gen�eration. We model this by way of a two generator Cournot game over a two node electricity network. We find that within the electricity system, emissions of carbon dioxide can increase after a carbon charge is introduced.

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Energy Specializations: Electricity – Markets and Prices ; Energy and the Environment – Climate Change and Greenhouse Gases; Energy and the Environment – Policy and Regulation

JEL Codes:
D42 - Market Structure, Pricing, and Design: Monopoly
Q54 - Climate; Natural Disasters and Their Management; Global Warming
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General

Keywords: Electricity market, Cournot, Climate policy, carbon tax, strategic behavior

DOI: 10.5547/ISSN0195-6574-EJ-Vol31-No4-7

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Published in Volume 31, Number 4 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.