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Product Abstract

Interactions Between Power Markets and Emissions Trading: A Simple Example

Product ID:3002008864
Date Published:20-Jun-2016
Sector Name:Environment
Document Type:Technical Results
Price:No Charge

This Product is publicly available

   623.20 KB - Adobe PDF (.pdf)


One well known method of reducing CO2 emissions is to impose a cap on total emissions across covered entities but then allow those entities to trade the right to emit CO2 within the cap. This is often referred to as “Cap and Trade.” Conventional economic wisdom holds that trading emission rights in a well-behaved competitive market should result in greater welfare (lower costs) for both trading parties. However, this wisdom appears to rely on the mitigation supply curves for each party to be independent – an assumption that does not hold in the electric sector where potential emissions trading parties likely already engage in electricity trade. This technical update demonstrates an example where an electric sector stakeholder, such as a state or utility, could realize higher costs by engaging in emissions trading than otherwise due to the presence of electricity trading. This has implications for environmental regulations such as the recently finalized Clean Power Plan, which allows states to choose whether to engage in inter-state emissions trading.

2016 Program 103   Analysis of Environmental Policy Design, Implementation and Company Strategy
  • Emissions Trading
  • Power Markets
  • Cap-and-trade
  • CO2 emissions reduction

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