The U.S. Clean Power Plan stipulates a state-specific performance-based CO2 emission standard, delegating states with considerable flexibility for using either a tradable performance-based or a mass-based permit program. This paper analyzes these two standards under imperfect competitive. We limit our attention to (1) short-run analyses and (2) a situation in which all states are subject to the same type of standard. We show that while the cross-subsidy inherent in the performance-based standard might effectively reduce power prices, it could also inflate energy consumption. A dominant firm with a relatively clean endowment under the performance-based standard would be able to manipulate the electricity market as well as to elevate permit prices, which might worsen market outcomes compared to its mass-based counterpart. On the other hand, the “cross-subsidy” could be the dominant force leading to a higher social welfare if the leader has a relatively dirty endowment.
BarrosoL.A.CarneiroR.D.GranvilleS.PereiraM.V.FampaM.H.C. (2006). “Nash Equilibrium in Strategic Bidding: a Binary Expansion Approach.” IEEE Transactions on Power Systems21(2): 629-638. https://doi.org/10.1109/TP-WRS.2006.873127.
2.
BertschJ.BrownT.HagspielS.JustaL. (2017). “The Relevance of Grid Expansion under Zonal Markets.” The Energy Journal38(5): 129-152. https://doi.org/10.5547/01956574.38.5Jber.
3.
BoomJ.T.DijkstraB.R. (2009).“Permit Trading and Credit Trading: A Comparison of Cap-Based and Rate-Based Emissions Trading under Perfect and Imperfect Competition.” Environmental and Resource Economics44: 107-136. https://doi.org/10.1007/s10640-009-9266-8.
4.
BoomJ.T.DijkstraB.R.McGintyM. (2014). “On Emissions Trading and Market Structure: Cap-and-Trade versus Intensity Standards.” Environmental and Resource Economics58: 665-682. https://doi.org/10.1007/s10640-013-9715-2.
5.
BurtrawD.PalmerK.PaulA.PanS. (2015). “A Proximate Mirror: Greenhouse Gas Rules and Strategic Behavior Under the U.S. Clean Air Act.” Environmental and Resource Economics62: 217-241. https://doi.org/10.1007/s10640-015-9963-4.
6.
BushnellJ.HollandS.P.HughesJ.KnittelC.R. (2017). “Strategic Policy Choice in State-Level Regulation: the EPA’s Clean Power Plan.” American Economic Journal: Economic Policy9(2): 57-90. https://doi.org/10.1257/pol.20150237.
7.
BushnellJ.ChenY. (2012), “Allocation and Leakage in Cap-and-Trade Markets for CO.” Resources and Energy Economics34(3): 647-668. https://doi.org/10.1016/j.reseneeco.2012.05.008.
8.
ChenY.HobbsB.F. (2005). “An Oligopolistic Power Market Model with Tradable NOX Permits.” IEEE Transactions on Power Systems20(1): 119-129. https://doi.org/10.1109/TPWRS.2004.840440.
9.
ChenY.SijmJ.HobbsB.F.LiseW. (2008). “Implications of CO2 Emissions Trading for Short-run Electricity Market Outcomes in Northwest Europe.” Journal of Regulatory Economics, 34(3): 251-281. https://doi.org/10.1007/s11149-008-9069-9.
10.
ChenY.HobbsB.F.LeyfferS.MunsonT. (2006), “Solution of Large-Scale Leader-Follower Market Equilibria Problems: Electric Power and NOX Permit Markets.” Computational Management Science3(4): 307-330. https://doi.org/10.1007/s10287-006-0020-1.
11.
ChenY.TanakaM. (2018). “Permit Banking in Emission Trading: Competition, Arbitrage and Linkage.” Energy Economics71: 70-82. https://doi.org/10.1016/j.eneco.2018.01.032.
12.
ChenY.TsengC-L. (2011). “Inducing Clean Technology in the Electricity Sector: Tradable Permits or Carbon Tax Policies?” The Energy Journal32(3): 149-174. https://doi.org/10.5547/ISSN0195-6574-EJ-Vol32-No3-6.
13.
ChenY.LiuA. L.HobbsB. F. (2011). “Economic and Emissions Implications of Load-based, Source-based and First-seller Emissions Trading Programs under California AB32.” Operations Research59(3): 696-712. https://doi.org/10.1287/opre.1110.0917.
14.
DavenportC.RubinA.J. (2017), “Trump Signs Executive Order Unwinding Obama Climate Policies.” The New York Times (March28, 2017).
15.
DownwardA. (2010). “Carbon Charges in Electricity Markets with Strategic Behavior and Transmission.” The Energy Journal31(4): 159-166. https://doi.org/10.5547/ISSN0195-6574-EJ-Vol31-No4-7.
16.
EgererJ.GerbauletC.LorenzaC. (2016). “European Electricity Grid Infrastructure Expansion in a 2050 Context.” Energy Journal37(SI3):101-124. https://doi.org/10.5547/01956574.37.SI3.jege.
17.
EshelD.M.D. (2005). “Optimal Allocation of Tradable Pollution Rights and Market Structures.” Journal of Regulatory Economics28(2): 205-223. https://doi.org/10.1007/s11149-005-3109-5.
FischerC. (2003b). “Output-Based Allocation of Environmental Policy Revenues and Imperfect Competition.” RFF Discussion Paper 02-60-2003, Washington, DC, U.S.
20.
Fortuny-AmatJ.McCarlB. (1981). “A Representation and Economic Interpretation of a Two-Level Programming Problem.” The Journal of the Operational Research Society32(9): 783-792. https://doi.org/10.1057/jors.1981.156.
21.
GabrielS. A.LeutholdF.U. (2010). “Solving Discretely-Constrained MPEC Problems with Applications in Electric Power Markets.” Energy Economics32: 3-14. https://doi.org/10.1016/j.eneco.2009.03.008.
22.
GibbonsR. (1992). Game Theory for Applied Economists, Princeton University Press, Princeton, NJ, U.S.
23.
GreenR. (2008). “Carbon Tax and Carbon Permits: The Impact on Generators’ Risks.” The Energy Journal29(3): 67-90. https://doi.org/10.5547/ISSN0195-6574-EJ-Vol29-No3-4.
24.
HahnR. W. (1984). “Market Power and Transferable Property Rights.” Quarterly Journal of Economics99(4): 753-765. https://doi.org/10.2307/1883124.
25.
HintermannB. (2011). “Market Power, Permit Allocation and Efficiency in Emission Permit Markets.” Environmental and Resource Economics49(3): 327-349. https://doi.org/10.1007/s10640-010-9435-9.
26.
HintermannB. (2017). “Market Power in Emission Permit Markets: Theory and Evidence from the EU ETS.” Environmental and Resource Economics66(1): 89-112. https://doi.org/10.1007/s10640-015-9939-4.
27.
HobbsB.F. (2001). “Linear Complementarity Models of Nash-Cournot Competition in Bilateral and POOLCO Power Markets.” IEEE Transactions on Power Systems16(2): 194-202. https://doi.org/10.1109/59.918286.
28.
HollandS. P. (2012). “Emissions Taxes versus Intensity Standards: Second-Best Environmental Policies with Incomplete Regulation.” Journal of Environmental Economics and Management63(3): 375-387. https://doi.org/10.1016/j.jeem.2011.12.002.
29.
HollandS.P.HughesJ.E.KnittelC.R. (2009). “Greenhouse Gas Reductions under Low Carbon Fuel Standards?” American Economic Journal: Economic Policy 1(1): 106-46. https://doi.org/10.1257/pol.L1.106.
30.
HurleyL.VolcoviciV. (2016), “U.S. Supreme Court Blocks Obama’s Clean Power Plan.” Scientific American. available at: www.scientificamerican.com/article/u-s-supreme-court-blocks-obama-s-clean-power-plan/.
31.
KunzF.RosellonJ.KemfertC. (2017). “Introduction of Nodal Pricing into the new Mexican Electricity Market through FTR Allocations.” The Energy Journal38(SI1): 157-172. https://doi.org/10.5547/01956574.38.SI1.fkun.
32.
MansurE. (2013). “Prices versus Quantities: Environmental Regulation and Imperfect Competition.” Journal of Regulatory Economics44(1): 80-102. https://doi.org/10.1007/s11149-013-9219-6.
33.
MisiolekW.ElderH. (1989). “Exclusionary Manipulation of Markets for Pollution Rights.” Journal of Environmental Economics and Management16: 156-166. https://doi.org/10.1016/0095-0696(89)90006-5.
34.
MountT.D.ManeevitjitS.LamadridA.J.ZimmermanR.D.ThomasR.J. (2012). “The Hidden System Costs of Wind Generation in a Deregulated Electricity Market.” The Energy Journal33(1): 161-186. https://doi.org/10.5547/ISSN0195-6574-EJ-Vol33-No1-6.
35.
ParryI.W.H.GoulderL.H.BurtrawD. (1997). “Revenue-Raising vs. Other Approaches to Environmental Protection: The Critical Significance of Existing Tax Distortion.” Rand Journal of Economics28(4): 708-731. https://doi.org/10.2307/2555783.
36.
PerezA.P.SaumaE.E.MunozF.D.HobbsB.F. (2016). “The Economic Effects of Interregional Trading of Renewable Energy Certificates in the U.S. WECC.” The Energy Journal37(4):267-259. https://doi.org/10.5547/01956574.37.4.aper.
37.
RuizC.ConejoA.J. (2009). “Pool Strategy of a Producer With Endogenous Formation of Locational Marginal Prices.” IEEE Transactions on Power Systems24(4): 1855-1866. https://doi.org/10.1109/TPWRS.2009.2030378.
38.
SartzetakisE. (1997). “Raising Rivals’ Costs Strategies via Emission Permits Markets.” Review of Industrial Organization12: 751-765. https://doi.org/10.1023/A:1007763019487.
39.
SchweppeF.C.CarmanisM.C.TaborsR.D.BohnR.E. (1988). Spot Pricing of Electricity, Kluwer Academic, Boston, MA, U.S. https://doi.org/10.1007/978-1-4613-1683-1.
40.
SiddiquiA.S.TanakaM.ChenY. (2016). “Are Targets for Renewable Portfolio Standards Too Low? The Impact of Market Structure on Energy Policy.” European Journal of Operational Research250(1): 328-351. https://doi.org/10.1016/j.ejor.2015.10.063.
41.
StavinsR.N. (1995). “Transaction Costs and Tradable Permits.” Journal of Environmental Economics and Management29: 133-147. https://doi.org/10.1006/jeem.1995.1036.
42.
StavinsR.N. (1998). “What Can We Learn from the Grand Policy Experiment? Lessons from SO Allowance Trading.” Journal of Economic Perspective12(3): 69-88. https://doi.org/10.1257/jep.12.3.69.
43.
TanakaM. (2009). “Transmission-Constrained Oligopoly in the Japanese Electricity Market.” Energy Economics31(5): 690-701. https://doi.org/10.1016Zj.eneco.2009.03.004.
44.
TanakaM. (2012). “Multi-Sector Model of Tradable Emission Permits.” Environmental and Resource Economics51(1): 61-77. https://doi.org/10.1007/s10640-011-9488-4.
45.
TanakaM.ChenY. (2013). “Market Power in Renewable Portfolio Standards.” Energy Economics39: 187-196. https://doi.org/10.1016/j.eneco.2013.05.004.
46.
TiroleJ. (1988). The Theory of Industrial Organization, The MIT Press, Cambridge, MA, U.S.
47.
TrabishH.K. (2015). “How Regional Compliance Can Help States Meet EPA Emissions Targets Faster and Cheaper.” Utility Dive, available at: www.utilitydive.com/news/how-regional-compliance-can-help-states-meet-epa-emissions-targets-fast-er-a/403677/.
48.
von der FehrN.-H.(1993). “Tradable Emission Rights and Strategic Interaction.” Environmental and Resource Economics3: 129-151. https://doi.org/10.1007/BF00338781.
49.
WeitzmanM.L. (1974). “Prices vs. Quantities.” The Review of Economics Studies41(4): 477-91. https://doi.org/10.2307/2296698.
50.
ZhangD.ChenY.TanakaM. (2018). “On the Effectiveness of Tradable Performance-based Standards.” Energy Economics74: 456-469. https://doi.org/10.1016/j.eneco.2018.06.012
Supplementary Material
Please find the following supplemental material available below.
For Open Access articles published under a Creative Commons License, all supplemental material carries the same license as the article it is associated with.
For non-Open Access articles published, all supplemental material carries a non-exclusive license, and permission requests for re-use of supplemental material or any part of supplemental material shall be sent directly to the copyright owner as specified in the copyright notice associated with the article.
