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Emissions Trading in Forward and Spot Markets for Electricity

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

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Energy Specializations: Electricity – Markets and Prices ; Electricity – Policy and Regulation; Energy and the Environment – Environmental Market Design; Energy and the Environment – Policy and Regulation

JEL Codes:
D42 - Market Structure, Pricing, and Design: Monopoly
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General
Q56 - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

Keywords: Cap-and-trade, Market power, Forward contract

DOI: 10.5547/01956574.33.2.9

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Published in Volume 33, Number 2 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.