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Long-Run Equilibrium Modeling of Alternative Emissions Allowance Allocation Systems in Electric Power Markets


  • Schulkin, J.Z.
  • Hobbs, B.F.
  • Pang, J.


A question in the design of carbon dioxide trading systems is how allowances are to be initially allocated: by auction, by giving away fixed amounts, or by allocating based on output, fuel, or other decisions. The latter system can bias investment, operations, and pricing decisions, and increase costs relative to other systems. A nonlinear complementarity model is used to investigate long-run equilibria that would result under alternative systems for power markets characterized by time varying demand and multiple generation technologies. Existence of equilibria is shown under mild conditions. Solutions show that allocating allowances to new capacity based on fuel use or generator type can distort generation mixes, invert the operating order of power plants, and inflate consumer costs. The distortions can be smaller for tighter CO2 restrictions, and are somewhat mitigated if there are also electricity capacity markets or minimum-run restrictions on coal plants.

Suggested Citation

  • Schulkin, J.Z. & Hobbs, B.F. & Pang, J., 2007. "Long-Run Equilibrium Modeling of Alternative Emissions Allowance Allocation Systems in Electric Power Markets," Cambridge Working Papers in Economics 0748, Faculty of Economics, University of Cambridge.
  • Handle: RePEc:cam:camdae:0748

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    Cited by:

    1. Paul Kleindorfer & Lide Li, 2011. "Portfolio risk management and carbon emissions valuation in electric power," Journal of Regulatory Economics, Springer, vol. 40(3), pages 219-236, December.
    2. David F. Drake, 2011. "Carbon Tariffs: Impacts on Technology Choice, Regional Competitiveness, and Global Emissions," Harvard Business School Working Papers 12-029, Harvard Business School.

    More about this item


    Emissions trading; allowance allocations; electricity; air pollution; auction; grandfathering; cost-effectiveness; greenhouse gases; climate change; global warming; carbon dioxide; generation investment.;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy
    • Q53 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling

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