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Electricity price behavior and carbon trading: New evidence from California

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  • Woo, C.K.
  • Chen, Y.
  • Olson, A.
  • Moore, J.
  • Schlag, N.
  • Ong, A.
  • Ho, T.

Abstract

The incidence of climate change policy is of great interests to economists, policy makers, producers and consumers. Using the daily market data for a 65-month period of 01/01/2011–05/31/2016, this empirical paper documents that the California Independent System Operator’s day-ahead prices have a CO2 premium approximately equal to natural-gas-fired generation’s marginal cost of CO2 emissions. This finding prevails in the six time-of-day periods developed to match the pricing periods used by the state’s local distribution companies and the bilateral trading of wholesale electricity in the Western Interconnection, a large electricity grid serving the western portion of North America and a Mexican state. Our findings suggest that the California cap-and-trade (C&T) program is effective in internalizing CO2 emission costs of the in-state natural-gas-fired generation. However, the program’s economic efficiency is compromised by the unintended consequence of power laundering under inter-regional trading of wholesale electricity. While the program encourages the Pacific Northwest’s hydro export that displaces California’s natural-gas-fired generation, it also induces output increases by non-California coal- and natural-gas-fired generators in the Western Interconnection. Hence, reducing the overall CO2 emissions in the Western Interconnection requires expanding the program’s geographic scope to meaningfully address the global warming problem.

Suggested Citation

  • Woo, C.K. & Chen, Y. & Olson, A. & Moore, J. & Schlag, N. & Ong, A. & Ho, T., 2017. "Electricity price behavior and carbon trading: New evidence from California," Applied Energy, Elsevier, vol. 204(C), pages 531-543.
  • Handle: RePEc:eee:appene:v:204:y:2017:i:c:p:531-543
    DOI: 10.1016/j.apenergy.2017.07.070
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