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Electricity price behavior and carbon trading: New evidence from California

Chi-Keung Woo, Y. Chen, A. Olson, J. Moore, N. Schlag, A. Ong and T. Ho

Applied Energy, 2017, vol. 204, issue C, 531-543

Abstract: The incidence of climate change policy is of great interests to economists, policy makers, producers and consumers. Using the daily market data for a 65-month period of 01/01/2011–05/31/2016, this empirical paper documents that the California Independent System Operator’s day-ahead prices have a CO2 premium approximately equal to natural-gas-fired generation’s marginal cost of CO2 emissions. This finding prevails in the six time-of-day periods developed to match the pricing periods used by the state’s local distribution companies and the bilateral trading of wholesale electricity in the Western Interconnection, a large electricity grid serving the western portion of North America and a Mexican state. Our findings suggest that the California cap-and-trade (C&T) program is effective in internalizing CO2 emission costs of the in-state natural-gas-fired generation. However, the program’s economic efficiency is compromised by the unintended consequence of power laundering under inter-regional trading of wholesale electricity. While the program encourages the Pacific Northwest’s hydro export that displaces California’s natural-gas-fired generation, it also induces output increases by non-California coal- and natural-gas-fired generators in the Western Interconnection. Hence, reducing the overall CO2 emissions in the Western Interconnection requires expanding the program’s geographic scope to meaningfully address the global warming problem.

Keywords: Electricity price behavior; Day-ahead market; Carbon trading; CO2 emissions cost pass-through; California (search for similar items in EconPapers)
Date: 2017
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