Equilibrium models for the carbon leakage problem

Giorgia Oggioni and Yves Smeers
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Giorgia Oggioni: Université catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE)
Yves Smeers: Université catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE)

No 2008076, LIDAM Discussion Papers CORE from Université catholique de Louvain, Center for Operations Research and Econometrics (CORE)

Abstract: Carbon leakage in this pape ris the phenomenon whereby Electricity Intensive Industries subject to harsh environmental standards move their activity or part of it to more environmentally lenient regions. Carbon leakage has been mentioned as a possible outcome of the EU Emission Trading Scheme. Different studies are underway to assess the reality of the phenomenon and to devise policies to mitigate its possible impact. One remedy, proposed by the Energy Intensive Industries is to combine free emission allowances with a pricing of electricity whereby energy emissions and transmission costs are bundled and sold on an average cost basis. The paper attempts to model this proposal. We cast the problem in a spatial model of the power sector where generators can develop new capacities, the transmission system is organized on a flowgate basis, emission allowances are auctioned, except possibly for industries, and traded. The consumer market is decomposed in two segments. Industries purchase electricity according to some form of average cost price, the rest of the market is supplied at marginal cost. These equilibrium models are non convex. We present the models and discuss their properties. Companion papers report policy implications.

Keywords: carbon leakage; emission trading scheme; electricity; energy policies; equilibrum; complementarity. (search for similar items in EconPapers)
JEL-codes: C61 L23 O14 O33 (search for similar items in EconPapers)
Date: 2008-12-01
New Economics Papers: this item is included in nep-ene and nep-env
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Citations: View citations in EconPapers (1)

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