Carbon Pricing with an Output Subsidy under Imperfect Competition: The Case of Alberta's Restructured Electricity Market

David Brown, Andrew Eckert and Heather Eckert

No 2017-1, Working Papers from University of Alberta, Department of Economics

Abstract: In this paper, we examine the use of carbon pricing and an output-based subsidy in a market with imperfect competition. We consider a carbon pricing policy in Alberta's electricity market as a case study. This policy consists of two phases. In the first phase, the carbon price is doubled with the output subsidy being based on a fraction of facility-level emission intensity. In the second phase, the carbon price will remain constant, while the output subsidy is altered to be uniform across assets and based on the emissions intensity of an efficient natural gas asset. Using a model of oligopoly competition, we simulate the short-run impacts of the two phases on electricity prices, emissions, and unit and firm-level profitability. We find that the mechanisms by which electricity prices and emissions change in response to carbon pricing differ depending on whether the market is perfectly competitive or oligopolistic. We demonstrate that regardless of market structure, changing the basis of the output subsidy has substantially larger effects than a doubling of the carbon price. The estimated effects of carbon pricing vary as the firms' generation portfolios change.

Keywords: Electricity; Market Power; Carbon Price; Pass-Through (search for similar items in EconPapers)
JEL-codes: D43 L51 L94 Q40 Q58 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2017-01-24
New Economics Papers: this item is included in nep-ene, nep-env and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Journal Article: Carbon pricing with an output subsidy under imperfect competition: The case of Alberta's restructured electricity market (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:ris:albaec:2017_001

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