IDEAS home Printed from https://ideas.repec.org/a/inm/oropre/v58y2010i3p529-548.html
   My bibliography  Save this article

Long-Run Equilibrium Modeling of Emissions Allowance Allocation Systems in Electric Power Markets

Author

Listed:
  • Jinye Zhao

    (ISO-New England, Holyoke, Massachusetts 01040)

  • Benjamin F. Hobbs

    (Department of Geography and Environmental Engineering and Department of Applied Mathematics and Statistics, The Johns Hopkins University, Baltimore, Maryland 21218, and ECN, Policy Studies Unit, Amsterdam, The Netherlands)

  • Jong-Shi Pang

    (Department of Industrial and Enterprise Systems Engineering, University of Illinois at Urbana--Champaign, Urbana, Illinois 61801)

Abstract

Carbon dioxide allowance trading systems for electricity generators are in place in the European Union and in several U.S. states. An important question in the design of such systems is how allowances are to be initially allocated: by auction, by giving away fixed amounts (grandfathering), or by allocating based on present or recent output, investment, or other decisions. The latter system can bias investment, operations, and product pricing decisions and increase costs relative to the other systems. A nonlinear complementarity model is proposed for investigating the long-run equilibria that would result under alternative systems for power markets characterized by time-varying demand and multiple technology types. Existence of equilibria is shown under mild conditions. Solutions for simple systems show that allocating allowances to new capacity based on fuel use or generator type can yield large distortions in capacity investment, invert the operating order of power plants, and inflate consumer costs. The distortions can be smaller for tighter CO 2 restrictions and are somewhat mitigated if there is also a market for electricity capacity or minimum-run restrictions on coal plants. Distortions are also less if allowances are allocated to plants in proportion to sales rather than capacity.

Suggested Citation

  • Jinye Zhao & Benjamin F. Hobbs & Jong-Shi Pang, 2010. "Long-Run Equilibrium Modeling of Emissions Allowance Allocation Systems in Electric Power Markets," Operations Research, INFORMS, vol. 58(3), pages 529-548, June.
    • Handle: RePEc:inm:oropre:v:58:y:2010:i:3:p:529-548
    DOI: 10.1287/opre.1090.0771
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/opre.1090.0771
    Download Restriction: no
    File URL: https://libkey.io/10.1287/opre.1090.0771?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Dissou, Yazid, 2005. "Cost-effectiveness of the performance standard system to reduce CO2 emissions in Canada: a general equilibrium analysis," Resource and Energy Economics, Elsevier, vol. 27(3), pages 187-207, October.
    2. Karsten Neuhoff & Kim Keats Martinez & Misato Sato, 2006. "Allocation, incentives and distortions: the impact of EU ETS emissions allowance allocations to the electricity sector," Climate Policy, Taylor & Francis Journals, vol. 6(1), pages 73-91, January.
    3. Sterner, Thomas & Muller, Adrian, 2006. "Output and Abatement Effects of Allocation Readjustment in Permit Trade," RFF Working Paper Series dp-06-49, Resources for the Future.
    4. Fischer, Carolyn, 2001. "Rebating Environmental Policy Revenues: Output-Based Allocations and Tradable Performance Standards," Discussion Papers 10709, Resources for the Future.
    5. Jos Sijm & Karsten Neuhoff & Yihsu Chen, 2006. "CO 2 cost pass-through and windfall profits in the power sector," Climate Policy, Taylor & Francis Journals, vol. 6(1), pages 49-72, January.
    6. Karsten Neuhoff & Markus Åhman & Regina Betz & Johanna Cludius & Federico Ferrario & Kristina Holmgren & Gabriella Pal & Michael Grubb & Felix Matthes & Karoline Rogge & Misato Sato & Joachim Schleich, 2006. "Implications of announced phase II national allocation plans for the EU ETS," Climate Policy, Taylor & Francis Journals, vol. 6(4), pages 411-422, July.
    7. Michael Grubb & Karsten Neuhoff, 2006. "Allocation and competitiveness in the EU emissions trading scheme: policy overview," Climate Policy, Taylor & Francis Journals, vol. 6(1), pages 7-30, January.
    8. Damien Demailly & Philippe Quirion, 2006. "CO 2 abatement, competitiveness and leakage in the European cement industry under the EU ETS: grandfathering versus output-based allocation," Climate Policy, Taylor & Francis Journals, vol. 6(1), pages 93-113, January.
    9. Karsten Neuhoff & Michael Grubb & Kim Keats, 2005. "Impact of the Allowance Allocation on Prices and Efficiency," Working Papers EPRG 0508, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.
    10. Karen Palmer & Dallas Burtraw & Danny Kahn, 2006. "Simple rules for targeting CO 2 allowance allocations to compensate firms," Climate Policy, Taylor & Francis Journals, vol. 6(4), pages 477-493, July.
    11. Damien Demailly & Philippe Quirion, 2006. "CO2 abatement, competitiveness and leakage in the European cement industry under the EU ETS: Grandfathering vs. output-based allocation," Post-Print halshs-00639327, HAL.
    12. Carolyn Fischer & Alan K. Fox, 2007. "Output-Based Allocation of Emissions Permits for Mitigating Tax and Trade Interactions," Land Economics, University of Wisconsin Press, vol. 83(4), pages 575-599.
    13. Damien Demailly & Philippe Quirion, 2006. "CO 2 abatement, competitiveness and leakage in the European cement industry under the EU ETS: grandfathering versus output-based allocation," Climate Policy, Taylor & Francis Journals, vol. 6(1), pages 93-113, January.
    14. Markus Åhman & Kristina Holmgren, 2006. "New entrant allocation in the Nordic energy sectors: incentives and options in the EU ETS," Climate Policy, Taylor & Francis Journals, vol. 6(4), pages 423-440, July.
    15. Pedro Linares & Francisco Javier Santos & Mariano Ventosa & Luis Lapiedra, 2006. "Impacts of the European Emissions Trading Scheme Directive and Permit Assignment Methods on the Spanish Electricity Sector," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 79-98.
    16. Burtraw, Dallas & Palmer, Karen & Bharvirkar, Ranjit & Paul, Anthony, 2001. "The Effect of Allowance Allocation on the Cost of Carbon Emission Trading," RFF Working Paper Series dp-01-30-, Resources for the Future.
    17. Benjamin F. Hobbs & J. S. Pang, 2007. "Nash-Cournot Equilibria in Electric Power Markets with Piecewise Linear Demand Functions and Joint Constraints," Operations Research, INFORMS, vol. 55(1), pages 113-127, February.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Christoph Weber & Philip Vogel, 2014. "Contingent certificate allocation rules and incentives for power plant investment and disinvestment," Journal of Regulatory Economics, Springer, vol. 46(3), pages 292-317, December.
    2. Frédéric Branger & Misato Sato, 2017. "Solving the clinker dilemma with hybrid output-based allocation," Climatic Change, Springer, vol. 140(3), pages 483-501, February.
    3. Vera Zipperer & Misato Sato & Karsten Neuhoff, 2017. "Benchmarks for Emissions Trading – General Principles for Emissions Scope," Discussion Papers of DIW Berlin 1712, DIW Berlin, German Institute for Economic Research.
    4. Demailly, Damien & Quirion, Philippe, 2008. "Changing the Allocation Rules in the EU ETS: Impact on Competitiveness and Economic Efficiency," Climate Change Modelling and Policy Working Papers 46623, Fondazione Eni Enrico Mattei (FEEM).
    5. Bushnell, James & Chen, Yihsu, 2012. "Allocation and leakage in regional cap-and-trade markets for CO2," Resource and Energy Economics, Elsevier, vol. 34(4), pages 647-668.
    6. Demailly, Damien & Quirion, Philippe, 2008. "European Emission Trading Scheme and competitiveness: A case study on the iron and steel industry," Energy Economics, Elsevier, vol. 30(4), pages 2009-2027, July.
    7. Pablo del Río & Javier Carrillo-Hermosilla & Totti Könnölä & Carlos Suárez, 2008. "Challenges and opportunities of a post-Kyoto mitigation regime: a survey of the European electricity sector," Mitigation and Adaptation Strategies for Global Change, Springer, vol. 13(8), pages 863-885, October.
    8. Yu-Jie Hu & Lishan Yang & Fali Duan & Honglei Wang & Chengjiang Li, 2022. "A Scientometric Analysis and Review of the Emissions Trading System," Energies, MDPI, vol. 15(12), pages 1-20, June.
    9. Jean-Philippe Nicolaï & Jorge Zamorano, 2018. "Windfall Profits Under Pollution Permits and Output-Based Allocation," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 69(4), pages 661-691, April.
    10. Barry Anderson & Corrado Di Maria, 2011. "Abatement and Allocation in the Pilot Phase of the EU ETS," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 48(1), pages 83-103, January.
    11. Misato Sato & Karsten Neuhoff & Verena Graichen & Katja Schumacher & Felix Matthes, 2013. "Sectors under scrutiny � Evaluation of indicators to assess the risk of carbon leakage in the UK and Germany," GRI Working Papers 113, Grantham Research Institute on Climate Change and the Environment.
    12. Boehringer Christoph & Fischer Carolyn & Rosendahl Knut Einar, 2010. "The Global Effects of Subglobal Climate Policies," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 10(2), pages 1-35, December.
    13. Philippe Quirion, 2022. "Output-based allocation and output-based rebates: a survey," Chapters, in: Handbook on Trade Policy and Climate Change, chapter 7, pages 94-107, Edward Elgar Publishing.
    14. Yoon, Kyoung-Soo & Oh, Hyungna, 2021. "Impacts of ETS allocation rules on abatement investment and market structure," Energy Economics, Elsevier, vol. 101(C).
    15. Bushnell, James & Chen, Yihsu, 2009. "Regulation, Allocation and Leakage in Cap-And-Trade Markets for CO2," Staff General Research Papers Archive 13131, Iowa State University, Department of Economics.
    16. Angela Köppl & Gregor Thenius & Stefan Schleicher, 2008. "Impacts of the EU Emissions Trading Scheme: Insights from the First Trading Period with a Focus on Competitiveness Issues," WIFO Studies, WIFO, number 33963, Juni.
    17. Meunier, Guy & Ponssard, Jean-Pierre & Quirion, Philippe, 2014. "Carbon leakage and capacity-based allocations: Is the EU right?," Journal of Environmental Economics and Management, Elsevier, vol. 68(2), pages 262-279.
    18. Frédéric Branger & Jean-Pierre Ponssard & Oliver Sartor & Misato Sato, 2015. "EU ETS, Free Allocations, and Activity Level Thresholds: The Devil Lies in the Details," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 2(3), pages 401-437.
    19. Jean-Philippe Nicolaï, 2015. "Emission Reduction and Profit-Neutral Permit Allocations," CER-ETH Economics working paper series 15/224, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
    20. Zetterberg, Lars, 2014. "Benchmarking in the European Union Emissions Trading System: Abatement incentives," Energy Economics, Elsevier, vol. 43(C), pages 218-224.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:oropre:v:58:y:2010:i:3:p:529-548. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.