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

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  • Yihsu Chen, Makoto Tanaka, and Afzal S. Siddiqui

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.

Suggested Citation

  • Yihsu Chen, Makoto Tanaka, and Afzal S. Siddiqui, 2018. "Market Power with Tradable Performance-Based CO2 Emission Standards in the Electricity Sector," The Energy Journal, International Association for Energy Economics, vol. 0(Number 6).
    • Handle: RePEc:aen:journl:ej39-6-chen
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    Cited by:

    1. Xenophon, Aleksis Kazubiernis & Hill, David John, 2020. "Adaptive mechanisms to refund emissions payments," Applied Energy, Elsevier, vol. 278(C).
    2. Jia, Zhijie & Lin, Boqiang, 2021. "The impact of removing cross subsidies in electric power industry in China: Welfare, economy, and CO2 emission," Energy Policy, Elsevier, vol. 148(PB).
    3. Wu, Wei & Zhang, Naishan & Hu, Yingying & Zhou, Dengli & Long, Houyin, 2023. "Crossing the cross-subsidy: Evidence from China's electricity sector," Utilities Policy, Elsevier, vol. 84(C).
    4. Zhu, Runqing & Lin, Boqiang, 2021. "Energy and carbon performance improvement in China's mining Industry:Evidence from the 11th and 12th five-year plan," Energy Policy, Elsevier, vol. 154(C).
    5. Geng, Wenxin & Fan, Ying, 2022. "An imperfectly competitive permit market under a rate-based scheme," Energy Economics, Elsevier, vol. 105(C).

    More about this item

    JEL classification:

    • F0 - International Economics - - General

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