Allocation and Leakage in Regional Cap-And-Trade Markets for CO2

The allocation or assignment of emissions allowances is among the most contentious elements of the design of emissions trading systems. �Policy-makers usually try to satisfy a range of goals through the allocation process, including easing the transition costs for high-emissions firms, reducing leakage to unregulated regions, and mitigating the impact of the regulations on product prices such as electricity. �In this paper we develop a detailed representation of the US western electricity market to assess the potential impacts of various allocation proposals. �Several proposals involve the ``updating'' of allowance allocation, where the allocation is tied to the ongoing output of plants. �These allocation proposals are designed with the goals of limiting the pass-through of carbon costs to product prices, mitigating leakage, and of mitigating the costs to high-emissions firms. �However, �some forms of allocation updating can also inflate allowance prices, thereby limiting the benefits of such schemes to high emissions firms. � Thus, the anticipated benefits from allocation updating can be diluted and further distortions introduced into the trading system.electricity markets; Cap-and-Trade; Emissions Leakage

CO2 cost pass through and windfall profits in the power sector’

This paper analyses the implications of the EU ETS for the power sector, notably the impact of free allocation of CO2 emission allowances on the price of electricity and the profitability of power generation. Besides some theoretical reflections, the paper presents empirical and model estimates of CO2 cost pass through, indicating that pass through rates vary between 40 and 100 percent of CO2 costs, or – in absolute terms – between 3 and 18 €/MWh, depending on the carbon intensity of the marginal production unit and other, market or technology specific factors concerned. As a result, power companies realise substantial windfall profits, indicated by empirical and model estimates presented in the paper. In order to avoid these windfall profits, the paper concludes that free allocation to power companies should be phased out in favour of auctioning

Allocation and leakage in regional cap-and-trade markets for CO2

The allocation or assignment of emissions allowances is among the most contentious elements of the design of emissions trading systems. Policy-makers usually try to satisfy a range of goals through the allocation process, including easing the transition costs for high-emissions firms, reducing leakage to unregulated regions, and mitigating the impact of the regulations on product prices such as electricity. In this paper we develop a detailed representation of the US western electricity market to assess the potential impacts of various allocation proposals. Several proposals involve the updating of allowance allocation, where the allocation is tied to the ongoing output of plants. These allocation proposals are designed with the goals of limiting the pass-through of carbon costs to product prices, mitigating leakage, and of mitigating the costs to high-emissions firms. However, some forms of allocation updating can also inflate allowance prices, thereby limiting the benefits of such schemes to high emissions firms. Thus, the anticipated benefits from allocation updating can be diluted and further distortions introduced into the trading system

Leader-Follower Equilibria for Power Markets in Presence of Prosumers

Increased penetration of distributed energy resources throughout the power sector has introduced a new entity in electricity markets, namely, prosumers, with the dual nature of concurrent consumption and generation. This paper assesses the market power potential of prosumers (leader) using a Stackelberg model formulated as a mathematical program with equilibrium constraints (MPEC). The MPEC is recast to a mixed integer program where the Wolfe’s duality is used to overcome the bilinear terms in the objective function, and disjunctive constraints are used to replace complementarity conditions. We apply the model to the IEEE 24-Bus Reliability System to illustrate market outcomes. We show that the Stackelberg strategy always yields higher payoff for the prosumers compared to Cournot and perfect competition cases. Moreover, the social surplus resulted from Stackelberg equilibrium, compared to the other strategies, is the highest (lowest) when the prosumer is in short (long) position. Our analysis contributes to understanding the potential outcomes when prosumers are introduced to marketplace in the power sector

Regulation, Allocation, and Leakage in Cap-and-Trade Markets for CO2

The allocation of emissions allowances is among the most contentious elements of the design of cap-and-trade systems. In this paper we develop a detailed representation of the US western electricity market to assess the potential impacts of various allocation proposals. Several proposals involve the "updating'' of permit allocation, where the allocation is tied to the ongoing output, or input use, of plants. These allocation proposals are designed with the goals of limiting the pass-through of carbon costs to product prices, mitigating leakage, and of mitigating costs to high-emissions firms. However, some forms of updating can also inflate permit prices, thereby limiting the benefits of such schemes to high emissions firms. Rather than mitigating the impact on high carbon producers, the net operating profit of such firms can actually be lower under input-based updating than under auctioning. This is due to the fact that product prices (and therefore revenues) are lower under input-based updating, but overall compliance costs are relatively comparable between auctioning and input-based updating. In this way, the anticipated benefits from allocation updating are reduced and further distortions are introduced into the trading system.

Decentralized Voltage Control with Peer-to-peer Energy Trading in a Distribution Network

Utilizing distributed renewable and energy storage resources via peer-to-peer (P2P) energy trading has long been touted as a solution to improve energy system’s resilience and sustainability. Consumers and prosumers (those who have energy generation resources), however, do not have expertise to engage in repeated P2P trading, and the zero-marginal costs of renewables present challenges in determining fair market prices. To address these issues, we propose a multi-agent reinforcement learning (MARL) framework to help automate consumers’ bidding and management of their solar PV and energy storage resources, under a specific P2P clearing mechanism that utilizes the so-called supply-demand ratio. In addition, we show how the MARL framework can integrate physical network constraints to realize decentralized voltage control, hence ensuring physical feasibility of the P2P energy trading and paving ways for real-world implementations

Aggregator-Enabled Prosumers' Impact on Strategic Hydro-Thermal Operations

Climate packages envisage decarbonization of the power system and electrification of the wider economy via variable renewable energy (VRE). These trends facilitate the rise of aggregator-enabled prosumers and engender demand for flexibility. By exploiting conducive geography, e.g., in the Nordic region, hydro reservoirs can mitigate VRE's intermittency. Nevertheless, hydro producers may leverage this increased need for flexibility to exert market power through temporal arbitrage. Using a Nash-Cournot model, we examine how aggregator-enabled prosumers with endogenous loads and VRE capacity interact with other agents to affect market outcomes. Based on Nordic data, we find that hydro producers enhance their market power by shifting their production away from periods in which prosumers are net buyers and "dumping" their output during periods in which prosumers are net sellers. Hence, jurisdictions that rely upon (hydro) storage to integrate VRE from prosumers will need to be wary of incumbent firms' incentives to manipulate prices

Analysis of high-speed rail and airline transport cooperation in presence of non-purchase option

We study cooperation between the airline and high-speed rail (HSR) sectors by formulating their joint profit as a maximization problem using a multinomial logit choice model in a three-node setting. We allow the non-purchase option as an outside option available to consumers. The demand for each choice is not only a function of the price but also the service quality, such as the total trip time, frequency of service, and ease of connecting from the hub to a nearby HSR station. As a result, the following findings are presented. First, regardless of the service quality of either sector and the non-purchase option, cooperation decreases the total volume of the domestic market of a country. Second, when the attractiveness of the outside option is high, the HSR and air sectors can prevent a large reduction in the total volume by cooperation in the connecting market. However, this is not the case in the domestic market. Third, if the non-purchase quality in the domestic market is high, then cooperation increases the social welfare of the whole market. If the non-purchase quality is low, then cooperation increases the welfare of the whole market only in cases where the number of potential customers in the connecting market is relatively large. We also show the effect of improving air–rail service quality on each market share and on the total profit. Document type: Articl

An Oligopoly Model to Analyze the Market and Social Welfare for Green Manufacturing Industry

As public concerns on sustainable economic development increase, an increasing number of manufactured products have found their environmentally preferable alternatives. In this study, we propose an oligopoly game theoretical model to analyze the competition between the green and ordinary manufacturing sectors. We identify cost efficiency and innovative design as key elements to the survival of green products. We also find that the effectiveness of Pigouvian tax and subsidy policies depend on product characteristics, market structures, as well as targeted results. Our small empirical examples on Corolla vs. Prius and Incandescent lamp vs. Compact fluorescent lamp (CFL) show that our modeling results are more optimistic than real market statistics. We identify pre-equilibrium market dynamics, consumer bias towards green products, and modeling limitations as the main reasons for such differences. We also investigate the market competition and total societal welfare in the presence of tax and subsidy policy intervention. The study results not only provide guidelines and managerial insights for green producers to understand the underlying factors that determine the competitiveness of green products in the market but also benefit policy makers by quantitatively showing the effectiveness of tax and subsidy policies in promoting green products

Regulation, Allocation, and Leakage in Cap-and-Trade Markets for CO2

Among the most contentious elements of the design of cap-and-trade systems for emissions trading is the allocation or assignment of the emissions credits themselves. Policy-makers usually try to satisfy a range of goals through the allocation process, including easing the transition costs for high-emissions firms, reducing leakage to unregulated regions, and mitigating the impact of the regulations on product prices such as electricity. In this paper we develop a detailed representation of the US western electricity market to assess the potential impacts of various allocation proposals. Several proposals involve the \updating" of permit allocation, where the allocation is tied to the ongoing output, or input use, of plants. These allocation proposals are designed with the goals of limiting the pass-through of carbon costs to product prices, mitigating leakage, and of mitigating the costs to high-emissions firms. However, allocation updating can also inate permit prices, thereby limiting the benefits of such schemes to high emissions firms. Rather than mitigating the impact on high carbon producers, the net operating profit of such firms can actually be lower under input-based updating than under auctioning. This is due to the fact that product prices (and therefore revenues) are lower under input-based updating, but overall compliance costs are relatively comparable between auctioning and input-based updating. Thus, the anticipated benefits from allocation updating are greatly reduced and further distortions are introduced into the trading system