The interaction between emissions trading and energy and competition policies
Emissions trading is a “cap and trade” regulation aimed at reducing the cost of meeting environmental targets. This paper studies how this regulation interacts with energy and competition policies. Two vertically related and imperfectly competitive markets are investigated: 1) the electricity market (output market); 2) the market for natural gas (input market). The effect of energy policy is simulated by assuming that the supporting scheme is able to improve the competitiveness of the low carbon technologies which are able, at the same time, to increase security of supply. The effect of the competition policy is accounted for by assuming that firms try to meet a profit target rather than to maximize profits, because of the regulatory pressure exerted by the competition and sector-specific authorities. By using the dominant firm model (in both markets) and the auction approach (in the output market), the paper highlights a trade-off between these policies. Without regulatory pressure, the result is ambiguous. Together, environmental and energy policies can lead to an increase in market power and its effects, but this in turn not necessarily amplifies their performances. However the worst case, the absolute increase in pollution in the short-run, is excluded. With regulatory pressure, the environmental and energy policies may imply a decrease in market power and this in turn can lessen their performance. In addition, this time the absolute increase in pollution in the short-run is not only possible but even likely. However this unfavourable effect would happen only if the pollution price is sufficiently low, that is if the environmental policy is rather modest. From the policy implications point of view, the analysis suggests what follows. If the models used to estimate performances and costs of environmental and energy policies ignore the full role of imperfect competition (the impact on prices combined with the strategic use of power capacity), this may induce incorrect estimations of the cost of the public action or may lead to incorrect policy calibrations, depending on how the policy targets are set. Finally, although the results are based on a series of simple assumptions about the operation and the structure of energy markets, they seem to be enough robust. Nevertheless the paper suggests caution in extending to other market structures the outcome of the dominant firm model.
|Date of creation:||31 Mar 2011|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.eui.eu/RSCAS/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- David Harbord & Natalia Fabra & Nils-Henrik von der Fehr, 2002.
"Modeling Electricity Auctions,"
Game Theory and Information
- M Ali Khan, 2007.
Microeconomics Working Papers
22207, East Asian Bureau of Economic Research.
- Levin, Dan, 1985. "Taxation within Cournot oligopoly," Journal of Public Economics, Elsevier, vol. 27(3), pages 281-290, August.
- Nils-Henrik von der Fehr & David Harbord, 2002.
"Competition in Electricity Spot Markets: Economic Theory and International Experience,"
- von der Fehr, N.-H. & Harbord,D., 1998. "Competition in Electricity Spot Markets. Economic Theory and International Experience," Memorandum 05/1998, Oslo University, Department of Economics.
- Hajime Sugeta & Shigeru Matsumoto, 2007. "Upstream and downstream pollution taxations in vertically related markets with imperfect competition," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 38(3), pages 407-432, November.
- Requate, Till, 2005. "Environmental Policy under Imperfect Competition : A Survey," Economics Working Papers 2005,12, Christian-Albrechts-University of Kiel, Department of Economics.
- Chernyavs'ka, Liliya & Gullì, Francesco, 2008. "Marginal CO2 cost pass-through under imperfect competition in power markets," Ecological Economics, Elsevier, vol. 68(1-2), pages 408-421, December.
- Denny, Eleanor & O'Malley, Mark, 2009. "The impact of carbon prices on generation-cycling costs," Energy Policy, Elsevier, vol. 37(4), pages 1204-1212, April.
- Garcia-Diaz, Anton & Marin, Pedro L., 2003. "Strategic bidding in electricity pools with short-lived bids: an application to the Spanish market," International Journal of Industrial Organization, Elsevier, vol. 21(2), pages 201-222, February.
- Joan Canton & Antoine Soubeyran & Hubert Stahn, 2008. "Environmental Taxation and Vertical Cournot Oligopolies: How Eco-industries Matter," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 40(3), pages 369-382, July.
When requesting a correction, please mention this item's handle: RePEc:rsc:rsceui:2011/20. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (RSCAS web unit)
If references are entirely missing, you can add them using this form.