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Economic and Environmental Consequences of Market Power in the South-East Europe Regional Electricity Market

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

Abstract

Market power in electricity and emission-permit markets in the South-East Europe Regional Electricity Market, which comprises both EU members subject to the EU Emissions Trading System (ETS) and non-EU members exempt from it, affects social welfare and carbon leakage. We examine its impact under three market settings: perfect competition (PC) and two leader-follower versions, in which a leader can exert market power in either the electricity market (S-T) or both the electricity and permit markets (S). Under PC, carbon leakage is equal to 11%-39% of ETS emission reduction depending on the cap stringency. Generally, in S-T, the leader's capacity withholding results in ETS emissions below and non-ETS emissions above PC levels. However, carbon leakage is lower vis-à-vis PC as the ETS emission reduction offsets the non-ETS emission increase. Finally, in S, the leader's propensity to lower the permit price increases ETS emissions and exacerbates carbon leakage compared to S-T.

Suggested Citation

  • Verena Viskovic, Yihsu Chen, Afzal S. Siddiqui, and Makoto Tanaka, 2021. "Economic and Environmental Consequences of Market Power in the South-East Europe Regional Electricity Market," The Energy Journal, International Association for Energy Economics, vol. 0(Number 6).
    • Handle: RePEc:aen:journl:ej42-6-siddiqui
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    JEL classification:

    • F0 - International Economics - - General

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