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Does a regional greenhouse gas policy make sense? A case study of carbon leakage and emissions spillover

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  • Chen, Yihsu

Abstract

The Regional Greenhouse Gas Initiative (RGGI) is a state-level effort by ten northeast states in the U.S. to control CO2 emissions from the electric sector. The approach adopted by RGGI is a regional cap-and-trade program, which sets a maximal annual amount of regional CO2 emissions that can be emitted from the electric sector. However, incoherence of the geographic scope of the regional electricity market is expected to produce two undesirable consequences: CO2 leakage and NOx and SO2 emissions spillover. This paper addresses these two issues using transmission-constrained electricity market models. The results show that although larger CO2 leakage is associated with higher allowance prices, it is negatively related to CO2 prices if measured in percentage terms. On the other hand, SO2 and NOx emissions spillover increase in commensurate with CO2 allowance prices. Demand elasticity attenuates the effect of emissions trading on leakage and emissions spillover. This highlights the difficulties of designing a regional or local climate policy.

Suggested Citation

  • Chen, Yihsu, 2009. "Does a regional greenhouse gas policy make sense? A case study of carbon leakage and emissions spillover," Energy Economics, Elsevier, vol. 31(5), pages 667-675, September.
  • Handle: RePEc:eee:eneeco:v:31:y:2009:i:5:p:667-675
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    Cited by:

    1. 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.
    2. Richard G. Newell & William A. Pizer & Daniel Raimi, 2013. "Carbon Markets 15 Years after Kyoto: Lessons Learned, New Challenges," Journal of Economic Perspectives, American Economic Association, vol. 27(1), pages 123-146, Winter.
    3. Chen, Yihsu & Hobbs, Benjamin F. & Hugh Ellis, J. & Crowley, Christian & Joutz, Frederick, 2015. "Impacts of climate change on power sector NOx emissions: A long-run analysis of the US mid-atlantic region," Energy Policy, Elsevier, vol. 84(C), pages 11-21.
    4. Palmer, Karen & Burtraw, Dallas & Paul, Anthony, 2009. "Allowance Allocation in a CO2 Emissions Cap-and-Trade Program for the Electricity Sector in California," Discussion Papers dp-09-41, Resources For the Future.
    5. repec:eee:eneeco:v:65:y:2017:i:c:p:251-261 is not listed on IDEAS
    6. Sauma, Enzo, 2012. "The impact of transmission constraints on the emissions leakage under cap-and-trade program," Energy Policy, Elsevier, vol. 51(C), pages 164-171.
    7. Billette de Villemeur, Etienne & Pineau, Pierre-Olivier, 2012. "Regulation and electricity market integration: When trade introduces inefficiencies," Energy Economics, Elsevier, vol. 34(2), pages 529-535.
    8. Bushnell, James & Chen, Yihsu & Zaragoza-Watkins, Matthew, 2014. "Downstream regulation of CO2 emissions in California's electricity sector," Energy Policy, Elsevier, vol. 64(C), pages 313-323.

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    Keywords

    Emissions trading Electric market CO2 leakage;

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