Economic and Environmental Consequences of Market Power in the South-East Europe Regional Electricity Market

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

The Energy Journal, 2021, vol. Volume 42, issue Number 6

Abstract: Market power in electricity and emission-permit markets in the South-East Europe Regional Electricity Market, which comprises both EU members subject to the EU Emissions Trading System (ETS) and non-EU members exempt from it, affects social welfare and carbon leakage. We examine its impact under three market settings: perfect competition (PC) and two leader-follower versions, in which a leader can exert market power in either the electricity market (S-T) or both the electricity and permit markets (S). Under PC, carbon leakage is equal to 11%-39% of ETS emission reduction depending on the cap stringency. Generally, in S-T, the leader's capacity withholding results in ETS emissions below and non-ETS emissions above PC levels. However, carbon leakage is lower vis-à-vis PC as the ETS emission reduction offsets the non-ETS emission increase. Finally, in S, the leader's propensity to lower the permit price increases ETS emissions and exacerbates carbon leakage compared to S-T.

JEL-codes: F0 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (2)

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