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Inducing Clean Technology in the Electricity Sector: Tradable Permits or Carbon Tax Policies?

Yihsu Chen and Chung-Li Tseng

Year: 2011
Volume: Volume 32
Number: Number 3
DOI: 10.5547/ISSN0195-6574-EJ-Vol32-No3-6
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Abstract:
Tradable permits and carbon taxes are two market-based instruments commonly considered by policymakers to regulate pollutions. While a tax is fixed, predetermined by authorities, the uncertain permits price is driven by market dynamics, fluctuating with the prices of natural gas and electricity. Both instruments offer firms different incentives for adopting clean technologies. This paper explores the optimal investment timing when a coal-fired plant owner considers introducing clean technologies in face of these two policies using a real options approach. We find that tradable permits could effectively trigger adopting clean technologies at a considerably lower level of carbon price relative to a tax policy. Higher levels of volatility in permit prices are likely to induce suppliers to take early actions to hedge against carbon risks. Thus, offset and other price control mechanisms, which are designed to reduce permit prices or to suppress prices volatility, are likely to delay clean technology investments.



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



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

Tanachai Limpaitoon, Yihsu Chen, and Shmuel S. Oren

Year: 2014
Volume: Volume 35
Number: Number 3
DOI: 10.5547/01956574.35.3.7
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Abstract:
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



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.





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