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Emissions Trading in Forward and Spot Markets for Electricity

  • Makoto Tanaka and Yihsu Chen

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.

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Article provided by International Association for Energy Economics in its journal The Energy Journal.

Volume (Year): Volume 33 (2012)
Issue (Month): Number 2 ()
Pages:

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Handle: RePEc:aen:journl:33-2-09
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  1. Mansur, Erin T, 2007. "Upstream Competition and Vertical Integration in Electricity Markets," Journal of Law and Economics, University of Chicago Press, vol. 50(1), pages 125-56, February.
  2. Yihsu Chen & Benjamin Hobbs & Sven Leyffer & Todd Munson, 2006. "Leader-Follower Equilibria for Electric Power and NO x Allowances Markets," Computational Management Science, Springer, vol. 3(4), pages 307-330, September.
  3. Robert W. Hahn, 1984. "Market Power and Transferable Property Rights," The Quarterly Journal of Economics, Oxford University Press, vol. 99(4), pages 753-765.
  4. James B. Bushnell & Yihsu Chen, 2009. "Regulation, Allocation, and Leakage in Cap-and-Trade Markets for CO2," NBER Working Papers 15495, National Bureau of Economic Research, Inc.
  5. Meredith L. Fowlie, 2009. "Incomplete Environmental Regulation, Imperfect Competition, and Emissions Leakage," American Economic Journal: Economic Policy, American Economic Association, vol. 1(2), pages 72-112, August.
  6. Morch von der Fehr, N-H., 1991. "Tradable Emission Rights and Strategic Interaction," Memorandum 11/1991, Oslo University, Department of Economics.
  7. Maeda, Akira, 2003. "The Emergence of Market Power in Emission Rights Markets: The Role of Initial Permit Distribution," Journal of Regulatory Economics, Springer, vol. 24(3), pages 293-314, November.
  8. Hege Westskog, 1996. "Market Power in a System of Tradeable CO2 Quotas," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 85-103.
  9. Bushnell, James, 2007. "Oligopoly Equilibria in Electricity Contract Markets," Staff General Research Papers 13135, Iowa State University, Department of Economics.
  10. Blaise Allaz & Jean-Luc Vila, 1993. "Cournot Competition, Forward Markets and Efficiency," Post-Print hal-00511806, HAL.
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