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The optimal percentage requirement and welfare comparisons in a two-country electricity market with a common tradable green certificate system

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  • Sun, Yanming

Abstract

The tradable green certificate (TGC) system, with its requirement for a percentage commitment to energy production from renewable sources, has become an important instrument in resolving greenhouse gas (GHG) issues and promoting the generation of sustainable energy. In this paper, based on the model of Aune et al. (2012) and the framework in Currier and Rassouli-Currier (2012), I analyze a competitive electricity market with two countries. I geometrically illustrate that under competitive equilibrium, variations in the renewable quota generate an “equilibrium locus” corresponding to the set of renewable/fossil fuel-based electricity supply and demand levels attainable across the two countries. With this concept, I further derive the pricing rule for TGCs when the percentage requirement is the only policy instrument and the regulator chooses it optimally to maximize welfare along the “equilibrium locus.” Using a geometric illustration, I compare the two countries' welfare when the renewable quota is chosen optimally in the common certificate market with three different situations, in particular: (i) before the introduction of a common TGC market when the renewable quota is chosen optimally; (ii) when all firms are fossil fuel energy producers and just produce the competitive equilibrium output; and (iii) when all firms are fossil fuel energy producers regulated by a CO2 emissions standard. I find that the total welfare with the optimal renewable share in a common certificate market is always greater than situations (i) and (ii), and is also greater than situation (iii) when damages by fossil energy producers are sufficiently bounded. Our policy recommendation is that when the value of the damage parameter is sufficiently small, full integration with a common TGC market is superior in terms of welfare to that of an entirely fossil fuel-based market with an optimal emissions standard. The numerical example demonstrates the welfare comparison results in the theoretical model.

Suggested Citation

  • Sun, Yanming, 2016. "The optimal percentage requirement and welfare comparisons in a two-country electricity market with a common tradable green certificate system," Economic Modelling, Elsevier, vol. 55(C), pages 322-327.
    • Handle: RePEc:eee:ecmode:v:55:y:2016:i:c:p:322-327
    DOI: 10.1016/j.econmod.2016.02.019
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    References listed on IDEAS

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    1. Currier, Kevin M., 2013. "A regulatory adjustment process for the determination of the optimal percentage requirement in an electricity market with Tradable Green Certificates," Energy Policy, Elsevier, vol. 62(C), pages 1053-1057.
    2. Eirik Amundsen & Fridrik Baldursson & Jørgen Mortensen, 2006. "Price Volatility and Banking in Green Certificate Markets," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 35(4), pages 259-287, December.
    3. Palmer, Karen & Burtraw, Dallas, 2005. "Cost-effectiveness of renewable electricity policies," Energy Economics, Elsevier, vol. 27(6), pages 873-894, November.
    4. Nielsen, Lene & Jeppesen, Tim, 2003. "Tradable Green Certificates in selected European countries--overview and assessment," Energy Policy, Elsevier, vol. 31(1), pages 3-14, January.
    5. Aune, Finn Roar & Dalen, Hanne Marit & Hagem, Cathrine, 2012. "Implementing the EU renewable target through green certificate markets," Energy Economics, Elsevier, vol. 34(4), pages 992-1000.
    6. Amundsen, Eirik S. & Nese, Gjermund, 2009. "Integration of tradable green certificate markets: What can be expected?," Journal of Policy Modeling, Elsevier, vol. 31(6), pages 903-922, November.
    7. Torstein Bye, 2003. "On the Price and Volume Effects from Green Certificates in the Energy Market," Discussion Papers 351, Statistics Norway, Research Department.
    8. Tamás, Mészáros Mátyás & Bade Shrestha, S.O. & Zhou, Huizhong, 2010. "Feed-in tariff and tradable green certificate in oligopoly," Energy Policy, Elsevier, vol. 38(8), pages 4040-4047, August.
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    Cited by:

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    3. Karakosta, Ourania & Petropoulou, Dimitra, 2022. "The EU electricity market: Renewables targets, Tradable Green Certificates and electricity trade," Energy Economics, Elsevier, vol. 111(C).
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    6. Yaxin Tan & Zhiyu Xu & Weisheng Xu, 2022. "A Two-Phase Hybrid Trading of Green Certificate under Renewables Portfolio Standards in Community of Active Energy Agents," Energies, MDPI, vol. 15(19), pages 1-17, September.

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    More about this item

    Keywords

    Optimal percentage requirement; Tradable green certificate system; Welfare; Greenhouse gas emissions;
    All these keywords.

    JEL classification:

    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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