Regional carbon policies in an interconnected power system: How expanded coverage could exacerbate emission leakage
2019
Višković, Verena | Chen, Yihsu | Siddiqui, Afzal S. | Tanaka, Makoto
Interconnected regional electricity markets are often subject to asymmetric carbon policies with partial coverage for CO₂ emissions. While the resulting problem of carbon leakage has been well studied, its mitigation has received relatively less attention. We devise a proactive carbon policy via a bi-level modelling approach by considering the impact of an emission cap that limits the cost of damage from a regional power market. In particular, a welfare-maximising policymaker sets the cap when facing profit-maximising producers and the damage costs from their emissions at two nodes. A partial-coverage policy could degrade maximised social welfare and increase total regional CO₂ emissions with potential for carbon leakage due to a higher nodal price difference. A modified carbon policy that considers CO₂ emissions from both nodes tightens the cap, which increases maximised social welfare and decreases total CO₂ emissions vis-à-vis the partial-coverage policy, albeit at the cost of greater scope for carbon leakage as it causes nodal prices to diverge. As a compromise, an import-coverage policy, implemented by California, that counts only domestic and imported CO₂ emissions could alleviate carbon leakage at the cost of lower maximised social welfare with higher total emissions vis-à-vis the modified-coverage policy.
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