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Investigating emission regulation policy in the electricity sector: modeling an oligopolistic electricity market under hourly cap-and-trade

Sameh El Khatib and Francisco D. Galiana

Energy Economics, 2019, vol. 78, issue C, 428-443

Abstract: Global warming is one of the most alarming phenomena facing our planet today. There is a consensus among scientists that human-induced greenhouse gases (GHGs) should be regulated to slow down the heating of the Earth's oceans and atmosphere. As a major GHG producer, the electricity industry's emissions should be considered in any global emission regulation policy initiative. This paper develops an original equilibrium model for a cap-and-trade emission regulation scheme (CAT) applied to an oligopolistic electricity market. The model accounts for the strategic behavior of power companies under emission regulation and explicitly illustrates how this behavior is influenced by the scheme design. The model respects the electricity sector's emission targets over a commitment interval while accounting for the effect of these targets on the hourly operation of electricity markets, given hourly variations in system demand. Simulation results over different demand levels show that the model of the proposed policy is successful in meeting short-term emission targets by dispatching generation based on privately owned power generating companies' (Gencos') generation costs and emission intensities. The results signify the importance of accounting for the effects of hourly permit trading on hourly market clearing and hourly gaming strategies when studying the allocation of commitment interval permits among Gencos.

Keywords: Emission regulation; Cap-and-trade policy; Oligopolistic electricity markets (search for similar items in EconPapers)
JEL-codes: Q4 (search for similar items in EconPapers)
Date: 2019
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Energy Economics is currently edited by R. S. J. Tol, Beng Ang, Lance Bachmeier, Perry Sadorsky, Ugur Soytas and J. P. Weyant

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