Leakage in Regional Climate Policy? Implications of Electricity Market Design

We study how the expansion of a centralized real-time electricity market affects emissions leakage from a regional cap-and-trade program. We find the expansion caused negligible to slight emissions reductions overall, but changes in dispatch patterns result in significantly different effects on coal and natural gas plants. Participating coal and gas plants from outside the cap-and-trade region increasingly balance intermittent renewable generation from inside the region. Market participation causes gas plants outside the cap-and-trade region to increase emissions and generation in the evening during peak load periods and at night when average wind generation inside the cap-and-trade region is high. Coal plants outside the region systematically ramp down in response to peak solar generation inside the region. Our results suggest that leakage effects from reduced transactions costs between regulated and unregulated regions depend on the effective portfolio of plants dispatched to meet renewable energy imbalances.