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The Impact of Imperfect Competition in Emission Permits Trading on Oligopolistic Electricity Markets

The impact and efficacy of a cap-and-trade regulation on the electric power industry depend on interactions of demand elasticity, transmission network, market structure, and strategic behavior of generation firms. This paper develops an equilibrium model of an oligopoly electricity market in conjunction with a Cap-and-Trade emissions permits market to study such interactions. The concept of conjectural variations is proposed to account for imperfect competition in the permits market. We demonstrate the model using a WECC 225-bus system with a detailed representation of the California market. In particular, we examine the extent to which permit trading strategies affect the market outcome. We find that a firm with more efficient technologies can employ strategic withholding of permits, which allows for its increase in output share in the electricity market at the expense of other less efficient firms. Keywords: Power market modeling, Cap-and-trade program, Market power, Conjectural variation

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JEL Codes: Q41: Energy: Demand and Supply; Prices, D21: Firm Behavior: Theory, D22: Firm Behavior: Empirical Analysis, L13: Oligopoly and Other Imperfect Markets, L11: Production, Pricing, and Market Structure; Size Distribution of Firms, Q53: Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling, Q54: Climate; Natural Disasters and Their Management; Global Warming, Q48: Energy: Government Policy

DOI: 10.5547/01956574.35.3.7

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Published in Volume 35, Number 3 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.


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