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Assessment of initial emission allowance allocation methods in the Korean electricity market

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  • Ahn, Jaekyun

Abstract

Korea will introduce an emission trading policy from 2015. The rules for the initial allocation of emission allowances have not been decided yet. This paper assesses the effect of various initial emission allowance allocation methods of the Korean electricity market. This study employs the mixed complementarity problem, which is able to incorporate operation, investment, and emission trade decisions in the deregulated electricity market in order to provide more realistic results. In particular, the allocation rules to existing plants and new entrants are modeled separately in this study. The model quantifies the impacts of different allocation rules on emissions, capacity mix, emission allowance prices, electricity prices, and social welfare. We examine typical allocation rules such as auction to all power plants, best available technology (BAT) benchmark to all power plants, fuel-specific benchmark to existing power plants along with BAT benchmark to new entrants, and fuel-specific benchmark to all power plants. We find that giving free allocations to new power plants prompts more new investment and this raises overall social welfare even though the direct cost of achieving the emission reduction target rises. While the auction is the most powerful policy to reduce emissions in the electricity sector, giving away permits to all power plants based on a fuel-specific benchmark encourages investment, increases output, and leads to a greater level of welfare from an imperfectly competitive industry.

Suggested Citation

  • Ahn, Jaekyun, 2014. "Assessment of initial emission allowance allocation methods in the Korean electricity market," Energy Economics, Elsevier, vol. 43(C), pages 244-255.
    • Handle: RePEc:eee:eneeco:v:43:y:2014:i:c:p:244-255
    DOI: 10.1016/j.eneco.2014.03.005
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    Cited by:

    1. Yu-Jie Hu & Lishan Yang & Fali Duan & Honglei Wang & Chengjiang Li, 2022. "A Scientometric Analysis and Review of the Emissions Trading System," Energies, MDPI, vol. 15(12), pages 1-20, June.
    2. Baochen Yang & Chuanze Liu & Yunpeng Su & Xin Jing, 2017. "The Allocation of Carbon Intensity Reduction Target by 2020 among Industrial Sectors in China," Sustainability, MDPI, vol. 9(1), pages 1-19, January.
    3. Yue-Jun Zhang & Jun-Fang Hao, 2017. "Carbon emission quota allocation among China’s industrial sectors based on the equity and efficiency principles," Annals of Operations Research, Springer, vol. 255(1), pages 117-140, August.
    4. Mei, Tianhua & Liu, Jie & Guo, Jianming & Siano, Pierluigi & Jin, Xuanxuan, 2022. "Allocation of emission allowances considering strategic voting," Energy Economics, Elsevier, vol. 114(C).
    5. Ru Li & Bao-Jun Tang, 2016. "Initial carbon quota allocation methods of power sectors: a China case study," Natural Hazards: Journal of the International Society for the Prevention and Mitigation of Natural Hazards, Springer;International Society for the Prevention and Mitigation of Natural Hazards, vol. 84(2), pages 1075-1089, November.
    6. Shaofu Du & Jun Qian & Tianzhuo Liu & Li Hu, 2020. "Emission allowance allocation mechanism design: a low-carbon operations perspective," Annals of Operations Research, Springer, vol. 291(1), pages 247-280, August.
    7. Qin, Quande & Liu, Yuan & Huang, Jia-Ping, 2020. "A cooperative game analysis for the allocation of carbon emissions reduction responsibility in China's power industry," Energy Economics, Elsevier, vol. 92(C).
    8. Zhengning Pu & Hui Wang & Haili Bian & Jiasha Fu, 2015. "Sustainable Lake Basin Water Resource Governance in China: The Case of Tai Lake," Sustainability, MDPI, vol. 7(12), pages 1-13, December.
    9. Bo Peng & Kun Lei, 2021. "An Analytical Approach for Initial Allocation of Discharge Permits with Consideration of the Water Environmental Capacity and Industrial Technical Feasibility," Sustainability, MDPI, vol. 13(24), pages 1-16, December.
    10. Liu, Liwei & Sun, Xiaoru & Chen, Chuxiang & Zhao, Erdong, 2016. "How will auctioning impact on the carbon emission abatement cost of electric power generation sector in China?," Applied Energy, Elsevier, vol. 168(C), pages 594-609.

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    More about this item

    Keywords

    Electricity; Emission trading; Initial allocation of permits; Auction; Benchmark; Social welfare; Mixed complementarity problem;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L19 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Other
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • Q49 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Other
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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