Regional carbon policies in an interconnected power system: How expanded coverage could exacerbate emission leakage

Verena Višković, Yihsu Chen, Afzal S. Siddiqui and Makoto Tanaka

Energy Policy, 2019, vol. 134, issue C

Abstract: Interconnected regional electricity markets are often subject to asymmetric carbon policies with partial coverage for CO2 emissions. While the resulting problem of carbon leakage has been well studied, its mitigation has received relatively less attention. We devise a proactive carbon policy via a bi-level modelling approach by considering the impact of an emission cap that limits the cost of damage from a regional power market. In particular, a welfare-maximising policymaker sets the cap when facing profit-maximising producers and the damage costs from their emissions at two nodes. A partial-coverage policy could degrade maximised social welfare and increase total regional CO2 emissions with potential for carbon leakage due to a higher nodal price difference. A modified carbon policy that considers CO2 emissions from both nodes tightens the cap, which increases maximised social welfare and decreases total CO2 emissions vis-à-vis the partial-coverage policy, albeit at the cost of greater scope for carbon leakage as it causes nodal prices to diverge. As a compromise, an import-coverage policy, implemented by California, that counts only domestic and imported CO2 emissions could alleviate carbon leakage at the cost of lower maximised social welfare with higher total emissions vis-à-vis the modified-coverage policy.

Keywords: Carbon leakage; Regional electricity markets; Bi-level modelling (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0301421519304926
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:enepol:v:134:y:2019:i:c:s0301421519304926

DOI: 10.1016/j.enpol.2019.110914

Access Statistics for this article

Energy Policy is currently edited by N. France

More articles in Energy Policy from Elsevier
Bibliographic data for series maintained by Catherine Liu ().